Examining Automated Systems Trading
Email This Article
Print This Article
Digg This
Delicious
SubscribeMOST POPULAR ARTICLES
- Options Corner: Capturing Time with Options
- My Trading Journey, Part I
- Weekly Outlook: August 25, 2008
- Option Watch: August 26—Mr. CLeaNE
- Closing Wrap-Up, August 25
- Kaeppel’s Corner: When Sideways Is Swell
- Closing Wrap-Up, August 27
- Growth Stock Swing Option: August 25, 2008
- Morning Watch, August 25
- Closing Wrap-Up, August 26
- Options Corner: Capturing Time with Options
- My Trading Journey, Part I
- Option Watch: August 26—Mr. CLeaNE
- REAL-WORLD TRADING: Five-Minute Success Formula
- PLATINUM TOOLBOX: The Method of the Skew Finder
- TRADING FLOOR SECRETS: When to Avoid Buying Calls
- KAEPPEL’S CORNER: Patience is a Virtue (But Who Has the Time?)
- Kaeppel’s Corner: The Long and Short of It, Part II
- Seven Essential Credentials of Successful Optionetics Students, Part III
- Platinum Tools: Probability Features—Getting Started
- Hot Shots: Stronger than Soft-Wear
- Economic Watchdog, August 27
- Midday Action: August 27
- Kaeppel’s Corner: When Sideways Is Swell
- Outside the Box: The Strengths and Weaknesses of Automated Trading Systems
- Dissecting Dividends
- Option Watch: August 26—Mr. CLeaNE
- Midday Action: August 26
- Tech World: Natus Medical Incorporated
- Growth Stock Swing Option: August 25, 2008
SPONSORED LINKS
May 12, 2008
Trading systems help foster trader discipline, and automated
systems offer additional advantages. The speed and efficiency with
which a computer identifies patterns and generates signals is one
obvious advantage. Computers can quickly achieve the number
crunching necessary to recognize trading signals. Computer systems
offer direction and suggestions about what to do in a given market
and help limit the range of choices. This makes the trader''s
task less daunting because the possibilities and opportunities
become more clearly identified.
Trading systems approach the market consistently and objectively.
Programs are designed logically. Rules are uniformly applied to
defined market conditions. Trading systems are effective since
rules are not the victims of trader judgment. The whimsical nature
of a trader is diminished by a system.
The emotional aspect of trading can be significantly reduced as
well since systems are void of emotion and judgment. Unfortunately,
the emotional tendency of a trader is to outguess the system, even
when it''s producing profitable trades. If a trader can
discipline themselves to follow a system, with rigor, emotions will
not rule the decision-making process. Trading systems are designed
to think, not to feel.
One of the more common arguments against trading systems is that
they can become popular enough to influence the underlying price.
The concern is that the similarity of computer-based systems used
to manage large positions may cause large traders to respond in the
same way at the same time, thereby causing distortion in the
markets.
Another argument against the use of trading systems is they define
market behavior in limited ways when the market can; in fact,
behave in an infinite number of ways. It is believed that because
systems are mathematically or mechanically defined, this reduces
relationships of events to percentage odds of what could happen
next. While the criticism is valid in that systems do capture a
very limited number of possibilities, this characteristic is also
what makes systems useful. The ability to reduce information to
observable patterns gives the trader some semblance of order and
direction. Without this, many traders feel overwhelmed and
directionless.
Trading systems give the trader a way to interpret, quantify, and
classify market behavior. Since trading systems define potential
opportunity and provide specific trading signals, following these
signals can facilitate the development of trading skills, as well
as the discipline.
Automated trading systems have expanded the scope of traders.
Systems can now be thoroughly back-tested and perfected using the
computer to test many if-then scenarios. Trading systems offer a
way to define and categorize market behavior by reducing
information to patterns and generating trading signals. While
systems are without emotion, traders are not and often try to
outguess a system. Misuse and lack of discipline are major causes
of losses in trading systems. Automated trading systems can go a
long way toward addressing these problems for the trader.
Jeff Neal
Senior Writer, Options Strategist & Profit Strategies Radio
Show Market Correspondent
Visit
Jeff''s Forum
Listen to Jeff at www.ProfitStrategiesRadio.com
© Copyright 1995-2008 Optionetics. All rights reserved. This material is for personal use only. Republication and re-dissemination, including posting to newsgroups, is expressly prohibited without the prior written consent of Optionetics. Optionetics is a registered trademark of Optionetics, Inc.