The inexperienced automatic trader should look for what we called in tradEAsy the “Holy Grail”, the perfect automatic system that is always right and you can retire with it. I am sorry to say that this is not going to happen.
We all know that markets are not rational, therefore, we can not create a rational system based on mathematic equations that can achieve perfection in an uncertainty scenario.
Does this mean that we can not create profitable systems? This statement is the other way around. Markets not being automatics does not mean that you can not take profit from automatic systems.
The most profitable fund in the world #
Many people think that automatic trading does not work (if I can not do it, no one can) as they have tried it before, but they could not get profit. We already know that a trader ego has no limits, that is the reason why many traders trust their intuitions and emotions, without following a clear operational strategy. To all of them, I do not know if you know the Renaissancefund. So, it results that it is the most profitable fund in the world that is managed by machines.
Obviously the knowledge and capacity level with their mathematical army is light years away from any trader, but this example is to raise awareness that with the expected value it is possible to make profits.
Markets not beign automatics does not mean that you can not take profit from automatic systems.
The expected value, the key to everything #
Going back to the premise that markets are uncertain, the expected value is our best ally.
Expected value is a statistical term that helps us to calculate probabilities based on past events.
Applied to automatic trading, the results obtained are analysed crossing 2 inputs: strategy and historical data. If we try a strategy based on rules, making a simulation, called backtesting, we will get a series of quantitative data. Si probamos una estrategia basada en una serie de reglas, haciendo una simulación, llamada backtest, obtendremos una serie de datos cuantitativos.
In a simplified way, it is convenient to evaluate two factors:
- Hit/miss percentage
- Average earning when hit/ average losses when miss.
You have to remember that the Holy Grail does not exist, so you should focus on taking a probabilistic advantage.
If we have a system that wins €100 40% of the times and when losing it only loses €20 60% of the times. If we make a simulation with 100 operations, it hits 40 times x €100 = +€4.000 and losses 60 times x €20 = -€1.200. The system has earned a net profit of €2.800.
There we have a good system considering expected value, although most of the times it misses.
The focus should be on this, you have to remember that the Holy Grail does not exist, so the obsession should be on taking profit from the probabilistic advantage. The losses must be accepted and managed as part of the process for having a profitable system.
Conclusion: Is automatic trading profitable? #
To the question above, what profitability has automatic trading? You will know that automatic trading is not an asset in which you can invest, and everyone gains or looses according to its evolution. It is an operative type that contains a lot of advantages as everything in life, and according to the knowledge, experience and, moreover, to the trader attitude will define our operation profitability.
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