Automated trading systems offer investors a unique way to achieve portfolio diversification while leveraging the power of technology to seek market opportunities on an almost 24-hour basis.
Also known as algorithmic trading or robo-investing, automated trading systems allow the investor to engage markets in an almost “hands-free” manner, without emotion, and without the need to be glued to the computer screen. It is a way of leveraging software’s capabilities to make multiple and synchronous calculations, to initiate accurate and rapid order executions, and to monitor and analyze markets on a non-stop basis.
Diversifying Your Portfolio Using Automated Systems
Portfolios consisting of automated trading systems have plenty of diversification features: commodity futures offer varying correlations to stocks and bonds; different commodity markets entail varying correlations among themselves, and different “strategies” can offer different correlations even within the same market (e.g. an intra-day versus a long-term strategy).
But algorithmic trading has its risks, and it isn’t for every trader or investor. Algorithmic trading can be difficult and complex to understand and evaluate. For this reason, Halifax America’s offers its Algo IQ services to help investors analyze trading systems to determine whether a given system may (or may not) be appropriate to them. Be sure to read the full risk disclosure below to see if algorithmic trading fits your financial goals and risk profile.
Not All Automated Systems are the Same
Like all investment strategies, some have performed better than others; some strategies that have performed well may not continue to perform well under changing market conditions, and vice-versa; some strategies are newer and haven’t proven themselves in a live market, and some of these newer strategies may go on to perform successfully in a live market while others may not.
It seems like a lot of variables! True, there are lots of things to take into consideration. There’s also a lot of data to sift through to make a thorough and detailed analysis. So where do you begin? The best way to start is to contact us and talk to one of our specialists at Halifax America.
But in case you are not ready to do that yet, here are some videos to help you get started. Bear in mind that this collection is by no means exhaustive, but it provides enough info for you to get started.
Building a Portfolio of Automated Trading Strategies
This video shows you the ins and outs of constructing a basic automated futures portfolio.
Evaluating Automated Strategies – Hypothetical vs. Live Results
All successful “live” strategies started on the hypothetical level; all poorly performing live strategies also started on the hypothetical level. Just because a simulated strategy—i.e. on that hasn’t yet been tested in the live markets—shows successful hypothetical results, it doesn’t mean that its success will transfer over to the live markets. So how what criteria can one use to help determine which systems might be more favorable? We have a few. Check out the video.
Using Worst Drawdown to Evaluate Automated Trading Strategies
Traders and investors typically respond strongly to equity drawdowns. Trading losses are painful to look at. But how might you know when to pull the plug on a system based on these losses? How many losses might be considered within the range of expectation and at what point might you consider that the losses have exceeded the expected range? This video shows you how to evaluate and select strategies based on historical losses.
Understanding Profit Factor
What if you came across a system that made an average profit 3 times a number of its losses? But what if its frequency of profits was only 30%? What if a system’s losses were greater than its profits but its frequency of profitable trades was high, say 65%? How can you weigh these stats against each other? This video discusses a simple metric called “Profit Factor” and how it relates to other metrics that are equally important to consider when analyzing trading performance.
Using Annual ROI to Analyze Trading Systems
Annual ROI—a system’s annual return-on-investment—is one of the first things an investor will look at when considering a trading strategy. But what are its caveats (hint: there are many).
When to Discontinue an Algorithmic System
There comes a point when an automated trading system alerts us that it is becoming a liability; that it is underperforming, or perhaps on the brink of “system death.” What are the red flags to watch out for? This video goes into an in-depth discussion on this topic.
Theory to Practice: Analyzing Algo IQ’s Weekly Top 10
What does a quick-style automated trading system analysis look like? Well, here’s an example using one of our Top 10 systems for the week.
Automated trading systems have their benefits, but they also entail risks, which is why you need to analyze each one carefully. These videos will help you get started with a few basics.
If you are interested in viewing our automated systems, feel free to visit our algorithmic systems page. If you would like to talk to one of our specialists, send us an email at email@example.com. Thank you for viewing our post and watching our videos!