Trading like a robot: looking at spread betting algorithms
WHEN spread betting, there is always the temptation to break your own rules. Traders often shift stop losses based on the gut feeling that they’re going to see a reversal and recoup their losses, or wait longer than planned before taking profit, wanting to make as much as they can, convinced that the movement still has a way to go. While this can sometimes pay off, more often that not, you can end up watching with your hands over your eyes as the folly of a shifted stop loss wipes out your day’s profits.
So maybe algorithmic trading programs are the answer to this problem. Having attended a trading seminar where the speaker said that in an ideal world, he would be shut off from all news sources and trade only from charts, surely a robot could be a better technical trader than a human? Even for spread betters with one eye on the fundamentals, there is certainly scope for algorithmic trading systems to help.
The algo systems used by the big trading houses are probably out of the reach of the average spread better, but Zignals, a free to use platform, could be an interesting alternative. It allows clients to create, test and exchange strategies and then sell a winning strategy on to others. According to Dan Moczulski, Zignal’s commercial director, a strategy has predetermined parameters with no emotion attached. Essentially, the two enemies of a trader – fear and greed – are removed. This allows the trader to trade the market rather than any emotional noise surrounding the trade. But Moczulski adds that a Zignal type algo system is an extension, rather than a substitution, for trader knowledge. “It’s worth noting that most strategies, especially those used by spread betters, will be based on parameters that are born from technical analysis so in that regard chartism is alive and well in strategy creation.”
Algo systems are especially useful when trading forex. Driven by macro-economic factors over micro, it suits rules and technical analysis. Equities can be influenced by directors’ sales, mergers and other inside information that is not represented on the chart, whereas with forex, market knowledge is encapsulated within the price.
Claudio Flores, vice president of business development at FXCM, which offers the FXCM Strategy Trader platform, says: “Automated trading continues to grow increasingly popular, and for good reason. For one, it can remove the emotional component of decision making inherent to trading. It also frees traders from constantly having to monitor the markets for trade opportunities, while still allowing them to place trades 24 hours a day. This can dramatically increase the number of potential trading opportunities.”
But, though useful, algo trading systems are not the silver bullet to solve every trader’s problems. According to Ian O’Sullivan of SpreadCo, while there are many traders who operate using an algo or black box type of trading operation, some view it as the reason why trading can be choppy at times. Recent flash crashes, such as the event at the start of the month when Nymex July natural gas dropped 39 cents (8.1 per cent) in a day, have been blamed by some on rogue algorithms, accelerating the falls as they sold frantically. Plenty disagree with this view but as O’Sullivan puts it: “There is no ‘golden ticket’ trading system out there, otherwise I wouldn’t be trading. I’d be on a beach in Mauritius.”