Tuesday, August 28, 2007
Definition of technical volatility
A resourceful trader knows his/her prey and can identify a stock's natural volatility so that a natural wiggle doesn't automatically hit a stop order (See AAPL's Volume Weighted Volatility). Even better traders know the volatility of each strategy they employ in the market (Hint: The Odds Maker provides this in its daily summary of backtested results).
Did you know you have your own personal trading volatility?
Ask your inner trader: How many times would you make 11 trades in a day if your first 5 were losing trades?
Nothing says that the first few trades must be winners to have a winning strategy. However, being human, few of us are Zen masters with nerves of steel. Often we get tired or lose our desire to trade if the first several positions do not work. I know many traders who operate under a 3 strikes and your out rule in the market. Maybe the 3 needs to be adjusted according to the strategy determined by the backtested results a trader obtains rather than a baseball rule uniformly applied to every trading situation.
The market takes the money from traders who can't stick to their rules - including weakly justified, non-evidence-based rules - and weeds them out. The 8th, 9th, and 10th trades might very well be the ones that would have not only put you over the top but would have made your day. But because you got frustrated you never saw those trades.
Fortunately good trading tools can act like the levees that hold back your tidal waves of emotion. Backtested strategies that tell you how many winning trades to expected out of every 10 trades, ratios of winning trades vs losing trades, and the option of automating those strategies rolling forward are the kind of discipline - reinforcing features you must demand from your tools.
That's the ballgame.
Tuesday, August 21, 2007
Emails and message board posts mentioned recently a fear that when it comes to automating a trader's trading strategies, their broker can either:
- See your strategies
- Trade against them
- Front run them or some combination thereof
In terms of the Trade-Ideas Automated Trading Bot (ATB) we want to make sure that those fears are put to rest. The only thing that your broker will see from you is dust, or in trading terms, the orders that you send out at the time you send them. One of the big advantages of using the Trade-Ideas automated trading system as an independent tool is a complete decoupling from your executing broker. This even applies to the current pilot partners testing Trade-Ideas' automation.
By design the Trade-Ideas ATB separates from the broker the strategies, which are based on alerts and filters from the trade instructions, which tell the robot what to do. Details like which way you are going (i.e., long or short) are not attached to the system you are trading through in any way. It is impossible for anyone much less a broker to know what you really intend on doing. Secondly your automated trading system is on a completely separate application which only talks to your broker via an API once there is a signal that needs to be traded.
Unlike TradeStation and some other tightly bundled broker-developed products, Trade-Ideas shields your strategy from our broker partners. Your broker can’t tell the difference between you placing a trade manually and the ATB placing a trade programmatically.
I think that's powerful information that only a trader should have. In poker terms that's keeping your cards close to the chest.
Tuesday, August 14, 2007
"Know your enemy. You're at war. They outgun you. In head-on combat, odds are against you. You must redefine the rules of engagement. Go into the shadows, yours. Never play by their rules, on their battlefield. Fight an asymmetrical war with the insurgent's tactics. Play your game, by your rules. You must decide. Fight your way ... and you will win."This is a great quote from Paul B Farrell’s recent article “Meltdown ‘inside’ Wall Street’s Brain". That article is not about Iraq. It is about your investing and trading future. The thing is that most investors still try to outthink the big houses. They want to find that one stock that the analysts have missed or find that interesting pattern that the quants haven’t uncovered. But guess what? Not going to happen.
Go into the shadows
For those who interact in the markets this way it's time to face reality and change strategy. “Go into the shadows”. Get small, get precise, get fast, and get out. There is only one thing you have over the big institutions: agility. They can’t move around 100 million at a clip but you can get in and out of 500 to 1000 shares pretty quickly. Know your edge and exploit it.
Trade-Ideas enables this kind of trading - with discipline. Trade-Ideas is your asymmetrical weapon. With the tools you can see the battle better than your enemy, giving you the advantage. They are bigger and stronger but you are faster and more nimble. Don’t go head to head, attack and retreat to fight another day.
Thursday, August 09, 2007
We congratulate the owners of Insight and Kershner Trading Group on this acquisition. Insight Trading is a scanning and filtering software company and one of the only pure play competitors to Trade-Ideas in terms of a software offering. Insight has been around for over 20 years and enjoys a very loyal following from the professional trading community.
In terms of the overall business implications we believe that this move points to the importance of real-time scanning and filtering software being the critical driver of brokerage transactions or DART’s (Direct Access Revenue Trades), the metric by which the brokerage industry grades itself. Financial terms of the acquisition were not disclosed.
For Trade-Ideas this acquisition leaves us as virtually the only commercially viable independent player in the high end analytics space. There are a lot of similarities and differences between the Trade-Ideas and Insight Trading software. Both products scan the entire US market tick for tick to point out interesting and actionable trading opportunities to the active trader. Both products are designed to let users create set ups which they think are interesting and then monitor those set ups in real-time.
In terms of the differences, Trade-Ideas, which was started in 2001 has had the benefit of having been written from scratch with the latest developments in client/server technology. We believe that age has its disadvantages when comparing Trade-Ideas to Insight Trading. We did not need to build on top of legacy systems which had been around for 20 years to make our software work. That freedom allowed us to deliver the highest quality product at a much lower price than Insight. Take a look at the pricing for Insight: http://www.insight-trading.com/pricing.htm. Here is a link to the pricing from Trade-Ideas: http://www.trade-ideas.com/PriceList.html.
In our biased opinion, Trade-Ideas has superior user interface which gives our customers a lot more power and freedom to create the type of systems that generate real, tangible results. We give our customers the ability to modify their strategies on the fly, without the need to contact tech support, and to back test those results to form a complete trading system from scratch.
Insight Trading Software is a good, competing software product which fills a growing need for technology that is starting to become recognized as the critical component in driving the trading business.
Wednesday, August 01, 2007
More on the Automated Trading Pilot with OptionsXpress
Trade-Ideas and OptionsXpress now offer fully automated equities trading to OptionsXpress customers. This offering is part of a pilot program that features the availability of a suite of tools at no cost to participants for the 3-month pilot. Please note: a subscription to Trade-Ideas PRO paid by participants is required to participate in the pilot. The cost of the subscription and more will be rebated back to participants from the commission on all trades (see pricing details from our previous post). Also note: ANY and all of these pilot details are SUBJECT TO CHANGE. What's presented here is what's known so far.
Already I am surprised by the amount of interest generated since mentioning it here. The enthusiastic response prompts us to provide more details.
Here is quick Q&A on the automated trading and pilot program.
- Q: Is the automated trading done through the web or via another way to connect to OptionsXpress?
A: A downloadable Trade-Ideas application automates the trading. Right now we are calling this application, the “OptionsXpress Automated Trading Bot (ATB)”. Other suggestions welcome. Of course you can still access your OptionsXpress account as usual via the web.
- Q: How does Trade-Ideas send orders via OptionsXpress?
A: Trade-Ideas connects to the OptionsXpress backend programmatically via an API. When a certain event takes place, such as an alert, our software sends an order to buy or short sell the stock depending on your configuration. The ATB automatically sends Stop Loss orders and Profit Target orders at the same time that the trade is entered.
- Q: Where and how do I create my automated trading strategies?
A: The OptionsXpress ATB uses Trade-Ideas alerts and filters. A two (2) step process automates the trading. First, create a set up in Trade-Ideas - for example, when a stock crosses above the 200 day simple moving average on higher than usual volume. Second, test that set up with position management rules you configure in The OddsMaker to make its performance in the recent market are what you would want them to be if you were trading. If you like the results you are ready to automate the results rolling forward.
- Q: Can I get help on setting up a strategy via Trade-Ideas and The OddsMaker?
A: Yes, we already provide one on one training to every new subscriber to Trade-Ideas to help them set up the strategy that works best for their particular trading style.
- Q: Will there be any training on how all of this new software works?
A: We are going to set up special one on one training sessions as well as continued support to get everyone that is going to be taking part in the pilot up to speed.
- Q: Do I need to have The OddsMaker to take advantage of the automated trading?
A: Yes. All of the automation software is based on The OddsMaker. Working with The OddsMaker prepares you to use the Automated Trading Bot as they use the same configuration settings. The OddsMaker is provided to you for free for participating in the pilot.
- Q: Does The OddsMaker factor in commission and slippage?
A: There are settings in The OddsMaker that allow you to factor in commission and slippage. Note that differences between backtested results and actual results always exist, as a trader you have to be aware of that and manage risk appropriately.
- Q: Must I only auto trade or is there any ability for me to get in and out of positions on my own?
A: You will be able to do a variety of trading. There is a complete automated mode that gets you in and out all programmatically. There are also user defined options where you can automatically enter but exit manually or vice versa. There is also an execution panel that lets you place any other kind of order that you may want to place as well as modify existing orders.
- Q: Can I set limits to how many times I want to trade per day?
A: Yes. The configuration window contains options where you can set all sorts of limits on your trading including the total number of trades that you make per day.
- Q: Can I have multiple strategies running at once? For example one for shorts and one for longs?
A: Yes. Run as many different strategies as you like at the same time. You are only confined by the buying power in your account. That is one of the reasons we suggest that you have at least 25K in your account to take advantage of NASD/SEC pattern day trading rules.
- Q: What does it mean if I am a Pattern Day Trader?
A: Pattern day trading is an SEC designation applying to any individual who buys and sells a particular security in the same trading day at least four times in a five-day period, and for whom same-day trades make up at least 6% of the trader's activity during that period. Pattern day traders are subject to special rules. Under the rules of the NYSE and the NASD, customers who are deemed “pattern day traders” must have at least $25,000 in their accounts and can only trade in margin accounts.
- Q: Are there any advantages to being a Pattern Day Trader?
A: While the SEC makes a point that day trading is extremely risky there are some advantages to being a pattern day trader. You receive 4 to 1 buying power and are able to reuse funds from transactions that take place during the day.
- Q: Will I have to pay extra money for the automated trading to Trade-Ideas?
A: No. You will not be charged for the automated trading by Trade-Ideas. You just need to have a subscription to Trade-Ideas PRO. Please contact us if interested in using The OddsMaker and the Automated Trading Bot - we will reserve a place for you in the pilot and provide you with the link to open an OptionsXpress account if you don't already have one.
- Q: When do you think we will be able to start doing this automated trading?
A: Most likely the pilot participants will be able to start trading toward the end of August. We have been exhaustively testing the software to get rid of as many problems as we can encounter and we want to make sure that we deliver a robust and stable product. Please remember this is still beta software.