What I find particularly interesting, certainly in an age where we have so much trading software and so many ‘robots’ designed to take the guesswork out of where the markets are headed, is that there is relatively little discussion about how good they really are. Indeed, rather than relying upon broker research or of course investment ‘gurus’, why do we not simply analyse a decent back tested algorithm on the stock or market we wish to trade? Surely, if there was more of this and less of the “human touch” everyone from day traders to fund managers would do so much better?
In fact, given how much technology there is around, it would appear that most people seem to prefer using the human brain (even with sleep deprivation or alcohol excess), rather than signals thrown out by a computer processor. For many retail investors, the nearest we get to Algo trading is to be bombarded by scam sounding emails claiming that you can buy an FX trading system for $50 to get it right 96% of the time and make a million in a few days (sound familiar? Editor interject – IF YOU RECEIVE AN EMAIL OFFERING YOU A SYSTEM/BIG CALL/MAKE MONEY – DELETE IT. THEY ARE ALL WORTHLESS – WE KNOW).
Well, as curiosity is my middle name, and, as I have more money than sense, in recent weeks and months I have been testing out the most interesting looking of the get rich quick trading software I could find. Most of them are designed for the Metatrader 4 trading platform, and which has become something of an industry standard. You simply pay your $50 and add the software program to Metatrader 4 and wait for the first blue arrow to appear on a chart to tell you to buy, and a red arrow to go short/reverse. In theory, given the way that all these pieces of software have allegedly been tested exhaustively, the idea is that your bank balance should swell.
On the basis that there is no time like the present, I am presenting a couple of my favourite trading systems which have at least on a paper trade basis done well/look set to do well illustrated with real cash. To give you an idea, I will demonstrate the performance of the two systems, both in the front month FTSE 100 futures contract. Both are working on the five-minute chart timeframe over the course of a day. As a matter of interest, I’ve been so busy today that I have not had the chance to even see whether they have performed well for not – something that makes the process all the more objective.
Taking the FTSE 100’s price action first, and what we can see is that after an initial gap down, this market was essentially an early steep sell, followed by a more orderly decline of more than 100 points. The problem was that periodically it appeared that a floor had been made and a bounce was due, something which may have caused traders to lose out in attempting to bottom fish.
If you took the trades on the open of the bar after the arrows appeared with System 1 at 8am and kept on going through the day until 5pm, I calculate around 30 points would have been made at most. This may not sound like very much, but it is not as if you had to work hard. Indeed, from what I know of the software, a staggered move down like this is probably showing it off at close to its worst. This is because, it seems, that similar to the MACD and CCI indicators in that the performance is best in ranging markets.
As far as System 2 is concerned, with an approach which seems to be a filtered parabolic one, we have the following trades. Short at the open at 8am a 6,704, long at 6672, short at 6,657 and then finally a buy at 6,622. This gives +32, -15, +35, for a total of +52. This is not as good as going short at the open and staying short for the rest of the day, but then we did not necessarily know that this morning did we?
In fact, I would conclude that trading systems can be a good idea IF you have the discipline to follow them. The irony is that if you have that much discipline when faced with the markets, then you would probably not need to use a system in the first place!