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Thanks for posting a very top level view of automated trading for engineers. In case discussion goes cynical here, I can attest to the fact that this sort of t

Thanks for posting a very top level view of automated trading for engineers. In case discussion goes cynical here, I can attest to the fact that this sort of thing can be done consistently and successfully for thousands of trades over months' time. These days though with HFT and "intelligent routing" your broker is your opponent in the equities world at least. When conditions become unfavorable to an algorithm things tend to fizzle out rather than wipe you out as long as you're not leveraged to the hilt. The point about optimizing is key: the best algorithm has the minimum number of parameters to tweak otherwise you're just curve-fitting. Whether you add value to the world is anyone's opinion. Proceed at your own risk of time and money.

jscheel 13y ago
Interesting, so, you are saying that the right approach (plus a religious avoidance of leveraged positions) is generally a low risk investment? What about trading fees, won't those progressively eat into you as your model continues to fizzle out at thousands of trades per month?
- rismay 13y ago
  Look into interactive brokers. Their fees are pennies per trade.
  - deleted 13y ago
    [deleted]
- OldSchool 13y ago
  Trading costs have to part of your model, but at Interactive Brokers for example you only pay $0.005/share (with a $1 minimum) to trade. At that rate you can try to trade for an average of pennies per share (including winners and losers). When an algorithm fizzles, my experience is that it stops making small amounts of money per trade on average and starts losing small amounts of money per trade on average, with more volatility. As you see then, you may automate trading itself, but then your discretion is shifted from deciding what stock to buy or sell short to when to turn on or off an algorithm. The advantage I suppose is that an algorithm isn't necessarily directly tied to market direction.
  - jscheel 13y ago
    Ah, thanks for the explanation! I've stayed completely away from forex, so I don't know much about it.
fixxer 13y ago
I can attest to the fact that this sort of thing can be done consistently and successfully for thousands of trades over months' time. Then you know that forex is a bank driven market; these little "statistical arbitrages" (which should be a 4 letter word) are subject to scale. When they break, they drain you dry. The "street" is littered with failed FX traders. It is the crack rock of the consumer level game because you can muster such phenomenal leverage (it isn't regulated nearly as much as equities). At the bank level, they can see who the counter party is and they track their interactions with you. If you milk them too much, they will block you and your trade is dead. I can attest to that. What is worse is the consumer-level brokers are essentially running a game against you. Caveat Trado
- OldSchool 13y ago
  My only experience is with equities, but yes forex is both highly leveraged and poorly regulated. Even in equities, your brokerage is not your friend: if you place a limit order, there's nothing to stop them from placing the same order just a bit closer to the market and using you as their free stop loss.
  - fixxer 13y ago
    Very true. Case in point, Ameritrade's odd marriage with Citadel... think they might be reading the tape? https://www.tdameritrade.com/forms/AMTD2055.pdf‎ https://www.tdameritrade.com/forms/AMTD2055.pdf‎
  - kasey_junk 13y ago
    I'm not sure I understand what you are saying. How does the brokerage make money off of that. If they are improving the price you haven't lowered their risk profile at all. If they are taking the other side of your trade and the market doesn't reflect that, they've actually given you a free roll.
    - fixxer 13y ago
      Suppose you want to buy XYZ for $1.00. You place your bid and are the highest price against a $1.03 offer. Evil broker places a $1.01 bid and gets a fill. He immediately offers $1.02. Case 1: The market runs up, he makes his tick on essentially zero commissions. On some markets, you earn commissions for providing liquidity. Case 2: The market falls off, he smacks your bid and only loses a penny. This is edge. EDIT: When I say "the market", he could base his actions off an index. As for "free roll", sure... but there is still an impact on liquidity and you're in a situation where you are more likely to get a fill whenever the market is going against you.

jscheel 13y ago

Interesting, so, you are saying that the right approach (plus a religious avoidance of leveraged positions) is generally a low risk investment? What about trading fees, won't those progressively eat into you as your model continues to fizzle out at thousands of trades per month?

rismay 13y ago
Look into interactive brokers. Their fees are pennies per trade.
- deleted 13y ago
  [deleted]
OldSchool 13y ago
Trading costs have to part of your model, but at Interactive Brokers for example you only pay $0.005/share (with a $1 minimum) to trade. At that rate you can try to trade for an average of pennies per share (including winners and losers). When an algorithm fizzles, my experience is that it stops making small amounts of money per trade on average and starts losing small amounts of money per trade on average, with more volatility. As you see then, you may automate trading itself, but then your discretion is shifted from deciding what stock to buy or sell short to when to turn on or off an algorithm. The advantage I suppose is that an algorithm isn't necessarily directly tied to market direction.
- jscheel 13y ago
  Ah, thanks for the explanation! I've stayed completely away from forex, so I don't know much about it.

fixxer 13y ago

I can attest to the fact that this sort of thing can be done consistently and successfully for thousands of trades over months' time. Then you know that forex is a bank driven market; these little "statistical arbitrages" (which should be a 4 letter word) are subject to scale. When they break, they drain you dry. The "street" is littered with failed FX traders. It is the crack rock of the consumer level game because you can muster such phenomenal leverage (it isn't regulated nearly as much as equities). At the bank level, they can see who the counter party is and they track their interactions with you. If you milk them too much, they will block you and your trade is dead. I can attest to that. What is worse is the consumer-level brokers are essentially running a game against you. Caveat Trado

OldSchool 13y ago
My only experience is with equities, but yes forex is both highly leveraged and poorly regulated. Even in equities, your brokerage is not your friend: if you place a limit order, there's nothing to stop them from placing the same order just a bit closer to the market and using you as their free stop loss.
- fixxer 13y ago
  Very true. Case in point, Ameritrade's odd marriage with Citadel... think they might be reading the tape? https://www.tdameritrade.com/forms/AMTD2055.pdf‎ https://www.tdameritrade.com/forms/AMTD2055.pdf‎
- kasey_junk 13y ago
  I'm not sure I understand what you are saying. How does the brokerage make money off of that. If they are improving the price you haven't lowered their risk profile at all. If they are taking the other side of your trade and the market doesn't reflect that, they've actually given you a free roll.
  - fixxer 13y ago
    Suppose you want to buy XYZ for $1.00. You place your bid and are the highest price against a $1.03 offer. Evil broker places a $1.01 bid and gets a fill. He immediately offers $1.02. Case 1: The market runs up, he makes his tick on essentially zero commissions. On some markets, you earn commissions for providing liquidity. Case 2: The market falls off, he smacks your bid and only loses a penny. This is edge. EDIT: When I say "the market", he could base his actions off an index. As for "free roll", sure... but there is still an impact on liquidity and you're in a situation where you are more likely to get a fill whenever the market is going against you.