What does “algorithmic trading” mean
Hi from Andrea Unger. A question often arises, where do I start?
Well, of course, my answer is, if you start, start with algorithmic trading. Panic: algorithmic!
It’s not that complicated. I mean, it’s not NASA stuff. It’s just to test what you intend to do.
It means you have an idea, you backtest it, just to be sure it worked. It has been working up until today, at least, because you would never go put your money into the market with something that proved to lose money. I hope so, at least.
What a “true” backtest reveals
Of course, if you are not able or you are not willing to perform the backtest, just rely on the backtest of somebody who is proven to be serious.
Be careful, backtest is the full calculation of what happened during the history.
Some people come and say, “Look, you have this strategy, it wins 90% of the time”. Nice, but this is not a backtest. This is just a statement. 90% are winners. But what happens in those remaining 10%? They don’t tell you. They didn’t measure that.
A backtest is measuring the 90% winners, but also the 10% losers, and evaluate the impact of those losing trades.
If you see that across the history, even in spite of the 10% loser, you are still fine and you make money, it’s fine. That is a backtest.
But if you see that the 10% losing trades are enough to wipe you out, you understand that that strategy is not for you in spite of the 90% winning rate.
Now, that said, a backtest measures exactly what happened, so, you need to approach in an algorithmic way, which means to measure your strategies.
The two paths of trading
Now, algorithmic then splits into two, systematic and mechanical. Which one? What’s the difference?
Systematic means that you have your strategies and you code them into your software so that the machine, the computer, will be trading on your behalf. Everything is automated.
Mechanical means you have your strategy, you have your signals, your setups, clearly tested and measured, and you place the orders manually.
This is what I was doing back in 2008, during my first Championship victory. At the time, there was no technology, or at least I didn’t know it, to send the orders automatically to the market. So I was getting signals out of the machine, and I was then placing manually the orders.
But I was there the whole day. I was sitting at the computer the whole day. And maybe this is not for you because maybe you have a 9:00 to 5:00 job, you cannot sit in front of the monitor all the time. So obviously, if you have something that trades heavily, the systematic way to go is a good solution for it.
The point is that you can automate the trades, but once you do that, still considering you have your money there, you have to monitor if everything is going the right way.
This is something that requires extra software to monitor what you are doing. Well, you don’t have to code the order submission and so on because there are software out there doing this perfectly.
I can just mention some Multicharts, TradeStation, NinjaTrader, ProRealTime. I mean, these all are good tools. I use Multicharts because it’s the one which is the best fit for me. But I mean, you don’t need that part of the coding stuff.
But the monitoring is something different, and you need to put that in place because you cannot go to bed, sleep with no control over what the machine is doing. This is my opinion.
This creates an extra, let’s say, weight on your psychology because you have no longer only the psychological issues related to trading, which are already, of course, normal, your money is in the markets. You are somehow bothered about that.
But also about the machine. You need to be sure that the machine and all the software that you are using are doing things properly.
If you’re not good with computers…
We noticed that many of our students don’t like this. If you are a, allow me, computer nerd, then okay, that’s fine. You love everything done by the machine, that’s your field.
But if you are just a person who is interested in trading and who is interested in figuring out the markets, this may be too much. In this case, the mechanical way to go is for sure the best choice you can make.
Mechanical trading: why it’s worth it
But you told me there are so many orders to place… Wait a minute. Yes, on a certain kind of strategies, but there are many other approaches that require far less orders to be placed. There are approaches that are really born to be mechanical, some spread trading on commodities, or we in Unger Academy apply mechanical trading to options trading.
Which approach to choose for smart trading
Be careful. On one side, options trading is better to be done mechanically because I don’t trust an automated submission of the order so far on options. But this is another story. But let’s say, why is options trading, the one we do at least at Unger Academy, perfect for mechanical trading?
Because we place orders maybe once a week, once a month, depending on our choices. But certainly this is something that we can easily manage. I don’t say it takes 10 minutes of your time to switch on and switch off a computer. No, it’s just a very limited amount of time.
And you can place the orders when you want. I mean, it’s not compulsory to send the orders at 3:00 PM, 7:00 PM. No. When it’s best for you, provided the market is open, you can place the order.
This is an enormous advantage so that you have only to take care of your broker’s platform where you place the orders. You have the signals and the setups. You know what you do, you know what order to place, and you decide when to place it.
So obviously, in this case, you are taking care only of the trading side. And this is, for a beginner, a must do, in my opinion, because you really benefit from learning trading, looking at what you do, living what you do, and not bothering about anything else, which in this case would be the machine.
Of course, once you are involved in this and you grow as a trader and you live the market, as I said, you can start having a peek at the other side, and probably passion will grow, and passion will grow together with curiosity, and these two together will lead you to add the systematic trading to your portfolio, which is good.
It’s absolutely good. I was born on systematic trading, and now I have both systematic trading and mechanical trading, in my case, on options, but also something else. I put them together. It’s a perfect fit because they work in a different way. They have different targets. I mean, everything is different. So, it’s a very good balanced portfolio.
But you can do everything only on mechanical trading and then slowly think about systematic trading on a second stage when you are already completely settled in the mechanical trading. Of course, it’s not compulsory, but I would not say it’s recommended, because it’s good to diversify, but it comes naturally in my opinion. But in any case, not compulsory.
I would get back to my questions: how do I start algorithm trading, which means backtested strategies and approaches to trade the markets, and then systematic or mechanical?
Are you a new beginner? A newbie? Mechanical. Mechanical because you will only care about trading. You will only care about trading and you won’t be compelled to think about something else which is the machine unless you love machines, and that is a different story.
But seeing a snapshot of our students at Unger Academy, we really noticed that this mechanical approach to the world of options is incredibly appreciated from many of them, most of them, and we’re happy about that. We definitely figured out that the mechanical way to go is the right way to start in your trading adventure.
