Automated Trading De-Mystified

Have you had thoughts of diving into the world of automated trading? We promise you there areliterally thousands doing it !!! If you are trading manually still, its like digging with a spade whileothers are using mechanized machinery. Do you think you can beat the computer? Do you think it isimpossible that a computer can mechanize your trading? Perhaps it is a way to put more disciplineinto your trading. We will attempt in this post to give a little background how you can get started.

1. Basics

The first thing you should consider is the set up of your environment. This includes the followingcheck list:

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Your physical environment - which should include a good Trade Server PC and a reliableInternet connection. Trade robots can be real Time intensive - so a strong dedicatedcomputer PC is recommended.

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Data sources - which includes your real time data feed and historical back testing data. Your current broker may have this but in addition you may want to purchase additional sources -such as historical data for back testing.

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Software trading platform - there are a variety of software trade platforms available such as:J Trader, Trade Station, Right Edge, X Trader, IQ Trader, CQG Trader Strategy Runner,Meta trader (and others) and our preferred platform provider . The key in your choice is theability to connect to your broker and execution performance, YOUR ability to program it(ease of use) and of course features and functionalities.

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Software development approach - you have basically two approaches: a.) do it yourself or b.) hire some one. If your choice is "a" but you have no programming skills - not to worry asmany of the software platforms can be programmed with wizards. If you program yourself,there is considerable help in developer forums and most platforms have many pre-builtlibraries and hence heavy programming is not required. If your choice is "b" then who youhire will be critical - but not to let it scare you. Consider somefreelanceoffshoredevelopers . They can be difficult but not that expensive. You do need to be somewhat PCliterate as robots do take a bit of care and babysitting.

2. The Blue Print

Once you have your Infrastructure worked out, you are ready to go to work. Write your strategy inEnglish to prepare a "Design Blue Print" - but do write it down and manually go through your TradeStrategy on paper - more on this later. Your strategy could start out as simply as to what you dotoday in your manual trading. Once you are in, you may discover more variations later. Our adviceis to print out a chart with your indicators and mark where it does and does not work. Analyze whyit does and why it does not work, and then build the condition sets accordingly.Once the Strategy idea is on paper, go directly to the development and requirements unit test phase.Once you have a working model, back test your strategy with historical data. Go back to your program and see where different parameters could make a difference in performance. Your software platform should have an optimizer and it will figure out the best values for your parameters - suchas the best Moving Average in your strategy. After you have designed, developed, tested andoptimized, you are ready for Live Testing. We recommend that you Live Test first with a test paper account and once you make money in a Paper Trading environment then move to a funded accountto make real money (Note: Paper trading accounts may not execute exactly the same as a livefunded account). You may find that you will need to back track a few steps until you get it right. Itis not uncommon that strategies in Back Testing do not work so well in Live Testing.

3. Details

The key obviously in your robot is the "design blue print," and so we spend a little bit of timediscussing what should be in it. Remember computers have no feelings, they can not sense marketsentiment, you must give it all parameters and event conditions to preform as you perform in your manual trading. Things like: if the market is volatile make the trade - is not good enough. You needto define what volatile means with some kind of data parameter or indicator. There are manystandard indicators in automated trading platforms and come as standard libraries so they do nothave to be programmed. For a robot there are three areas that need to be defined (We have put in parenthesis the effect of these design requirements relative to their result in profit for the robot fromour experience.):

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Trade trigger (40% of the strategy): This describes what event(s) occurred to cause you toenter a trade. This needs to describe the algorithmic condition(s) that need to be met to enter the trade. This can be as simple as two moving averages crossing over, a previously definedindicator like Stochastics at a plus 80 level, computed support areas/trend lines (with lengthsand slope rates) or even a specific candle stick formation. The possibilities are infinite. Inreality there most likely many events that need to be considered before all events aresatisfied to make the trade. All these events need to be described in detail - just make surethere is a data point number associated with each of your events.

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Trade filter (20% of the strategy): This describes the events that causes the trade trigger to be invalid. For example; you will notice in your manual trading that a strategy may work well in chop markets but not in sharply trending markets - and vice versa. Filters need to beapplied to ensure that this is correctly managed. A simple Moving Average cross over strategy is a looser because the trades that are good in a trending market will be eaten alive by chop ... over time the net is zero, unless the proper conditions of this filter are notapplied.

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Order management (40% of the strategy): This describes how you want the order to flow interms of scale-in, scale-out, risk stops, profit stops, break even stops and if part of your strategy trailing stops. In addition you must define if this is to managed by the strategy or use exchange orders. For example you may want to adjust stops or manage exits based onyour strategy conditions or merely allow the exchange to manage the stops/profits withtrailing stops, market/limit orders, floating tick stops, break even stops, etc ...