Recently, while traveling through the Northwest, I had the opportunity to share coffee with Jane and talk with her about algorithmic trading and systems development. We discussed at length the trials and tribulations of our respective trading journeys. She suggested that it might be an interesting post to hear from a member as to how they found their way to algorithmic trading, and I agreed.
I had my first taste of trading while in college taking a finance course. We were given a set amount of money for our portfolio, made stock selections, and then checked the Wall Street Journal the next day to see how we were doing. It intrigued me that by picking the right stock you could create money from what seemed like nothing. There really wasn’t a system, just picking stocks we knew or caught our fancy.
Though I pretty much just practiced a buy and hold strategy, I studied and learned about other trading methodologies. I dabbled with covered calls and options. I had a short-lived career as a futures trader, but couldn’t compete with the speed and execution of the floor traders.
Through all of this, I learned a lot about myself. Though I had a great desire to be successful, my emotions would get the best of me, forcing me out of good trades and holding losers too long. The stocks I bought and held did well, while the active trading portion of my portfolio failed to beat the market.
When the internet bubble burst in 2000-2001, I watched half of my trading account evaporate in what seemed like a matter of days. I had no contingency plans to handle this crisis and didn’t trust myself to actively manage my portfolio.
My day job was in real estate and mortgage financing. The period from 2000-2006 was one of the greatest for the industry. Since I was doing so well at my job, I didn’t put much focus on my stock and mutual fund portfolios. I felt that it was a good idea to just let the pros handle picking the stocks since they had access to more information and could do it better than me. Over time, my portfolio recovered.
I remember the day in September 2007 when I returned from vacation to find that all sources of mortgage funds had been suspended indefinitely. This event was a huge revelation for me. Not only was my job and source of income threatened, but my portfolios were once again decimated. The pros I thought knew everything and could avoid any serious declines were caught-unawares. Some were discovered taking enormous risks with the funds under their care without disclosing these risks to their clients. The government bailed out many of these big institutions with the average investor left holding the bag. No one was looking out for me.
At this time, I decided I needed to take control of my future. I went back to studying trading in all of its forms. Swing trading, day trading, futures, forex, stocks and options. No subject was off limits. I went deeper into the psychology of trading reading Mark Douglas and Van K Tharp.
I learned that successful traders don’t worry about individual trades. They develop a system that gives them an edge, and their goal is to execute that system without error. They focus on risk management.
As I became more active trading my portfolio, I found that my emotions began affecting my results again. I needed to find a way to trade while keeping these emotions in check. For me that meant finding a mechanical system because I didn’t trust myself with any subjectivity.
Along came algorithmic trading. The company I was researching provided different algorithms to professional money managers to build a portfolio of trading systems. Each system had over 10 years of back-tested data. Their systems gave entry and exit signals for your portfolio. You just had to follow the signals. Though there were draw downs, you could see the equity curve continue to grow by simply executing the system without any subjectivity.
After about six months of research and discussions with a company representative, I started trading their systems. I also made the commitment that I would take all the signals. My goal was to flawlessly execute the system. I started small and had a great first month. I then committed more funds and promptly went into a four month losing period. I stayed true to my commitment and the system recovered the losses and went on to make new equity highs.
Towards the end of that year, the company decided to go back into private money management using the systems they developed. Before that happened, I was introduced to Quantitrader. I liked the results provided as they were actually better than the system I was trading, better returns and smaller draw downs.
So here we are. I now trade for a living. Algorithmic trading has greatly improved my trading. I find that I am not as emotional in my trades, trusting my edge over time. I have gained a broader perspective on trading. The discipline I developed to follow the signals from the algorithm has helped with following other short-term, day-trading systems. I still have the same emotions (especially these past few weeks), but I am better able to keep them in perspective and follow my system. It is no longer about any single trade or even a series of trades, but the overall edge you have over time. “You have to see the forest from the trees.” Algorithmic trading has helped me to see that forest.