An Algo for Your Bra and Your Account

As New York Times recently wrote, these days there is an algorithm for everything -- even a bra. Apparently retailers now have a monstrously complex 2000 factor method to make sure that ladies have that perfect fit.

Algos, have been on my mind a lot lately, especially this week after I attended the FXIC forex conference in New York where I had a chance to meet a bevy of algorithmic traders and talk shop for hours on end. When K and I started out in this business we were the classic “have-a -hunch-bet-a-bunch” proprietary traders, but as computers in the retail forex have moved from analytics to execution we find ourselves moving more and more towards an algorithmic way of trading.

Algorithmic trading sounds intimidating, but it is nothing more than modeling price behavior which in turns means understanding how humans react. Although most novice traders believe that algorithms are highly quantitative in nature that’s not so. Algorithmic trading is less about mathematics and more about psychology. In fact many very successful algorithms are ridiculously simple in their premise and exploit one or two common market behaviors with clear, logical risk controls.

Just like in real life anything can be turned into an algo. I am even developing an algo that tries to take advantage of the idiocy of the markets, which I have dubbed “The George Costanza” and for which I hold strong promise.

But perhaps the most interesting takeaway from this week’s conference is that despite the massive array of programming talent, most algo traders I met admitted in private conversation that they maintain strict human control over their creations. In other words, no matter how good your algo -- it is at the core just a dumb piece of code that will inevitably miss the nuance of the market.

It is at those times that the truly successful algo traders intervene and take control over their code. Mind you I am not saying that you need to second guess every trade -- that is a very common and tragic mistake that many traders make. Rather, I am saying that despite the massive computational power that we all posses, there is still room for art in trading. There is still a time when the most important part of the model is to know when to turn it off.

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Boris Schlossberg

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