Once you decide you want to trade with an algorithm, your first challenge is to pick the system designed for someone like you.
There are more trading services out there than Pampers has diapers so to find your treasure trove, you may have put away the remote, give up a few ESPN sessions, and spend some quality time with your computer.
In this blog article, we addressed a few areas that needed investigation before deciding on such a system and today we are going expand that universe.
Every trader knows that the first step in building trust is finding the intestinal fortitude required to stick to the rules like a shirt sticks to your back when you forget to use Bounce in your dryer. But trusting a method that you have yet to have had a first date can be a complex and perplexing hurdle.
It’s the trading’s world chicken and egg problem: without trust, you can’t execute your trades without flinching but without executing your trades like an iRobot Roomba 690 after dust bunnies, you can’t gain trust because your results won’t be consistent nor profitable.
If you stumbled upon a system that turned your head like the gorgeous blond in a short tight red dress who just walked by but it only trades intraday and, unfortunately, you “have a real job to go to all day,” this is not the system for you. On the other hand, if you like to take control of your hard earned money, you probably don’t want a buy and hold strategy. I guess you could hire a financial advisor and trust he/she will take as good care of your money as you would.
Why did that last sentence almost make me burst into laughter?
Or you could just buy mutual funds, they all have your best interests at heart, don’t they?
If you need something in-between, you probably should look for a system that swing trades.
Understand your Trading Vehicle
This seems too obvious to mention but stick with me here, you have to understand the vehicle you’re trading. You probably have run across services that have found all sorts of mind-numbingly complex ways to trade: Forex, Options, Futures, Volatility.
But should you decide to tackle options I suggest you learn to converse with words like Delta, underlying instrument, calls, puts, implied volatility, spreads.
If you want to sound somewhat intelligent when talking to a futures trader, I suggest you know what is meant by; front month, e-minis, maintenance margin, overnight margin.
If you want to trade Forex I suggest you … don’t.
If you want to keep it simple and trade what 90% of the rest of us trade, stick with equities.
As you know, only the best traders are principled enough to:
- have a plan before entering a trade,
- take a trade when their rules tell them to even if every fiber of their body tells them not to and have a well-tested and
- has a well thought out money management regime.
QiT’s proprietary money management solution is called Advance Slot Technology. Since I have written extensively about this subject and I can see the eyes rolling and hear the “Ya, Ya Jane we know all about it” I have given you a link to the article on the website.
This article is getting long in the tooth. So I’m not going to go over each of these next items but link you to the articles on the QiT Website.
- Stop Loss or Dynamic Stop – how does the system you’re evaluating exit positions.
- I’ve talked a lot about Trade-Through and I will not rehash it but make sure you understand how any system you are thinking about trading handles this. Really it’s important.
- Tick Size Pilot Program, “Small-cap stocks have run into pricing for certain issues that reflect an increment of 5 cents. This is the result of the Oct. 3 implementation of a two-year plan called the ‘Tick Size Pilot Program (TSPP)’ a plan that was initiated by the SEC with the goal of improving liquidity of small cap securities.” How does the system you are evaluating handle this little gem?
Metrics of a trading system
There is a lot more I could write about when trying to build a tower of trust but I’m going to resist. However, I can’t leave a topic of how to gain trust without talking about a systems metrics. Here is a list of the metrics QiT offers to its members:
- Compounded Annual Return for backtested results and for live results.
- Average trades per month
- Maximum consecutive wins
- Maximum consecutive loses
- Average days held
- Profit Factor
- Max Drawdown
- Drawdown duration
Once I started writing about this subject my biggest issue was when to stop. I hope I didn’t bore you too much. I really do love writing, talking and just living all things to do with Algo trading.
We’re the Plan in “Plan your Trade and Trade your Plan” – TraderJanie
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