How to Turn Your Trading Robot into Your Servant, Rather Than Your Master

Boris Schlossberg

One of the most entertaining and thought-provoking interviews I listened to recently was a Two Blokes Trading podcast that featured Will Hunting who is really a kindred spirit of mine.

Will, who is a discretionary trader, rips apart all the conventional data driven platitudes that pass for “modern trading advice” for the retail trader. Namely, he takes issue with the idea that you need thousands and thousands of data points in order to prove your strategy “right.” Specifically, Will makes the counterintuitive point that the more data you have -- the less valuable your signals will be. Something that worked in 2011-2013 is very unlikely to work today even if the overall equity curve of the strategy is positive.

When I was a young trader I remember that like every newbie, I was enamored with rising equity curves -- the longer the better. Until one day I took a closer look at a system that was wildly positive over the past decade only to realize that it made equity highs 18 months ago and was actually slowly losing money ever since.

This death by a thousand cuts, or a lobster slow boil is the most common problem that trips up systematic traders. They do all the right things only to wind up with all the wrong results, or as Will put it in the interview, tongue firmly planted in cheek, “I have a lot of respect for professional system traders who keep going until they go broke.”

The point being that all systematic trading is the application of a static model to dynamic price action and while the model is important -- critical even -- to consistent trading success, it needs human oversight. Discretionary trading in the true professional sense is not just random placing of trades by “feel”, but the rather judicious use of your model under live market conditions. In short, good discretionary trading looks to minimize the selection of “bad” trades in your model.

Now I know that this is much harder to do than it sounds -- and it certainly requires experience and judgment, but in the end, I think it is the best way to trade.

Which got me thinking. In retail FX, we have the great benefit of encoding our trading models into MT4 EAs which do all the clerical drudgery of culling through price data to find the trades but then take every signal indiscriminately.

So one way to improve that is to run the EA on a demo account and then have the signals sent directly to your smartphone. If you like the setup you can place the trade on your real account. If not, you can pass it up. You are still using your trading model but you act as the human filter and this “pause” provides you with more control and more accuracy. It’s no panacea, but it is an intelligent way of introducing discretion into a formal trade model.

I, Robot

Boris Schlossberg

Robots will treat humans like “pet Labradors”.
Elon Musk Tesla Motors.

Speaking at a recent technology conference, founder of Apple Steve Wozniak said that at first the thought of artificially intelligent beings in charge of everything scared him. But now it’s a comforting thought. Fast forward hundreds of years to when robots are in charge. At that time, humans will probably be treated in a similar fashion to dogs.“It’s actually going to turn out really good for humans,” he added. “And it will be hundreds of years down the stream before [artificially intelligent beings would] even have the ability.”

So while the great minds of our times have already made peace with the idea that we will be nothing but playthings for the great machines of the future, I am not quite ready to concede all control to software just yet. Anyone who has ever run a algorithm on market data knows that “artificial intelligence” is the biggest oxymoron there is.

At BK we build EA’s all the time. We build news EA’s, we build trend EA’s we build day trading EAs but I am always astounded by the disappointment of some traders who ask -- “What -- I can’t just let it run 24/5?”

No my friend you CAN’T let an EA run 24/5 and expect it to make money. We are not making widgets here. It’s not like brewing beer, or pouring steel or doing some other mindless industrial process that you can duplicate over and over and over again. Trading is like life. Its different every day. It may be SIMILAR but it is NOT THE SAME.

That’s why anyone who thinks that an EA alone will make them money is the biggest fool there is. (Millisecond front running HFT algos that cost hundreds of millions of dollars to install are a different story -- and even they only win 54% of the time)

EA at their best are simply glorified order management systems. Very valuable to be sure, both in their ability to quickly execute trades and in their accuracy of controlling risk. But the ultimate buy and sell decision is always up to you.

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In the end trading is the art of reading the market and no robot can do that without some oversight. If they could, then there should be one EA out there that you can just buy off the shelf, plug into your account and then come back a year later to find a pile of profits. When you find one let me know.