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Some other commenters have hinted at this but... I feel sad whenever people build this kind of stuff. It's probably a very well built product (or will be) and i

by gbasin 13y ago

Some other commenters have hinted at this but... I feel sad whenever people build this kind of stuff. It's probably a very well built product (or will be) and is better than the alternatives out there, but the unfortunate fact is that anything that enables and encourages active trading in modern financial markets is setting 99% of their customers up for failure. And the 1% that are actually on to something will quickly move off the platform onto their own, or will end up losing whatever they make when their strategy loses whatever alpha it has and they can't admit it (I've seen this happen, but never the former, actually). Trading is hard. I run a proprietary trading firm with modern technology infrastructure and we have a lot of trading experience. You really have very little chance of success unless you're doing this full time, and even then it will take years before you have enough experience to build a sustainable income.

yarou 13y ago
In other words, there's no easy way to get rich. There is always pain involved, and people looking to get rich quick in financial markets are probably better off learning how to play poker.
- breischl 13y ago
  Because playing poker is a much easier way to make a sustainable income! Hm... actually, it might be. At the very least you certainly don't have to shell out as much for software.
  - gizmo686 13y ago
    Also, in zero sum games like poker and investing, the real question is how much better then the competition you are. In investing, you are up against some really good competition. In poker, you can play against a lot of recreational players, who are could be far less skilled then you. With online poker, you can play many low value hands in parallel to get even easier competition.
    - gnaritas 13y ago
      That depends on where you invest, all markets are not equally competitive.
- lutusp 13y ago
  > In other words, there's no easy way to get rich. Of course there are -- very easy ways. But there's no reliable easy way to get rich. > people looking to get rich quick in financial markets are probably better off learning how to play poker. If we eliminate "quick", then not true. All one needs to do is invest in an equity index fund and patiently wait decades while ignoring the dubious claims of investment counselors. It's very reliable. With respect to "quick", that also happens but with much less reliability. Consider that a blind computer program randomly flipping coins, with no strategy at all, will enrich a small percentage of its accounts by chance alone. This works for people too, but it's a rare, chance outcome, not any kind of strategy. More here: http://arachnoid.com/equities_myths http://arachnoid.com/equities_myths
  - yarou 13y ago
    The only case where a completely random strategy works is if there are black swan events occurring at equally random intervals. I agree on the buy-and-hold index fund advice.
    - lutusp 13y ago
      > The only case where a completely random strategy works is if there are black swan events occurring at equally random intervals. It depends on how you define "works". A random strategy doesn't work at all on average, it can only be said to "work" for the 1/2 of the investors that by chance fall above the average. And a random sequence is by definition a series of black swans. Unless you're saying that a black swan can only be an extraordinarily unlikely occurrence, in which case all we need do is wait a little longer for the improbable but eventually certain outcome that will meet anyone's definition of black swan. There are 23 people in a room talking. Pretty quickly two of them realize they have the same birthday. Is that a black swan? After all, there are 365 1/4 days in a year -- how unlikely is it for two of 23 random people to have the same birthday? Is it 23 / 365.25 (6.2%) or is it more or less likely? My point? Not all apparent black swans are really black swans.
oofabz 13y ago
I agree that day trading is a terrible idea, but how do you feel about laymen investing with a buy-and-hold strategy? If you buy large cap stocks and avoid making trades there is not much risk. This kind of strategy enables laymen like myself to do about as well as the market, without paying a middleman such as a mutual fund.
- gbasin 13y ago
  You're probably leaving most of the diversification benefit (which is the only edge you really have, unless you're assuming a fat equity risk premium haha) on the table unless you're a pro at that, as well. I think some of the newer automated-investment services are OK at building portfolios, although I would personally want a lot more exposure to other currencies/markets than my home (see: Home Country Bias)
- lutusp 13y ago
  > ... how do you feel about laymen investing with a buy-and-hold strategy? The answer is that buy & hold is a very reliable way to grow your capital, and it does without the services of investment advisors and brokers, which is why they don't want you to find out about it. On average, buy & hold investors do better than those who enlist the help of brokers or who become day traders (who on average do worse than anyone else). For actual evidence, one need only examine the outcome of the Wall Street Journal dartboard contest, which compared expert equity picks to random picks. The expert picks weren't sufficiently better than random picks to justify the broker fees, and this outcome went on for years. http://www.investorhome.com/darts.htm http://www.investorhome.com/darts.htm Quote: "... the performance of the pros versus the Dow Jones Industrial Average was less impressive. The pros barely edged the DJIA by a margin of 51 to 49 contests. In other words, simply investing passively in the Dow, an investor would have beaten the picks of the pros in roughly half the contests (that is, without even considering transactions costs or taxes for taxable investors)."
  - sopooneo 13y ago
    I read these sorts of outcomes periodically and it always makes me wonder how on earth managed funds stay in business? How can an industry that does no better than chance on average continue to exist?
minimax 13y ago
I come from a similar background (automated trading) but have the opposite opinion. More people ought to understand how the markets work. One good way to learn is to trade a small account. Yes you will probably lose a little money (or fail to beat the indexes) but you will also come away with a much better grasp of markets and trading (and hopefully also risk management). If you look at a typical discussion of trading here on HN you will see lots of totally uninformed hyperbolic assertions about what goes on in the market. How everything is rigged and how corrupt the players are. I think trying to scare people out of the markets only promotes that kind of thinking.
- lutusp 13y ago
  > If you look at a typical discussion of trading here on HN you will see lots of totally uninformed hyperbolic assertions about what goes on in the market. How everything is rigged and how corrupt the players are. Yes, one does see such remarks, but an excellent counterargument is almost never heard-- and that is that (a) business leaders aren't stupid and (b) if the equities market was really significantly rigged or inefficient, these people would refuse to raise capital using equities. The fact that some of the most skeptical, cautious people in existence, people with plenty of practical experience, are willing to fund their businesses with equity capital, means that equity trading is substantially fair and that the efficient market hypothesis is at least approximately true.
  - gnaritas 13y ago
    > The fact that some of the most skeptical, cautious people in existence, people with plenty of practical experience, are willing to fund their businesses with equity capital, means that equity trading is substantially fair and that the efficient market hypothesis is at least approximately true. That's a pretty bold claim. Given the financial crash of 08, from what I can tell the EMH has been thoroughly debunked. Markets are not efficient and all data is not priced in. Information is not absorbed quickly into the market so inefficiencies crop up everywhere all the time, those are the profit opportunities that traders make a living off of. If EMH were correct, the systematic risk that crashed the market could not have occurred. Remember, it's a hypothesis, not a theory.
gnaritas 13y ago
Everything you said could practically be applied to any skilled profession. Being an X is hard, 99% of people fail at X. What makes trading any harder than programming or engineering or abstract mathematics or physics? Successful traders exist, plenty of people trade for a living. People have to try something to see if it's something they're good at and most people aren't good at most things. Pointing that out X is hard and most people fail is a tautology, it's true of all difficult professions.
- lutusp 13y ago
  > What makes trading any harder than programming or engineering or abstract mathematics or physics? That's easy to answer -- if you're very smart, you will do better in math and physics, and the positive correlation between intelligence and success actually has meaning. But in equities trading, being very smart does no good at all, and might even represent a handicap. The reason? Equity pricing is mostly random noise, very high entropy. Many very smart people have tried to model and then beat the market, and (apart from chance outcomes) no one has succeeded in the sense that they located a reliable, describable "method" for it. Also, if in principle someone discovered an actual winning system, by publishing the system he would destroy its effectiveness (because once a "system" is put into practice, once everyone uses it, it loses its effectiveness). Obviously for a random collection of investment schemes, half will do better, and half worse, than the average market, but the half that do better will naturally enough claim the outcome resulted from their investment genius -- even if they're smart enough that they should know better. I can use a computer to model a random market and random investors, using random price changes and random trades, and not surprisingly, half the investors will do better than the average outcome. What is surprising is that, when the above-average investors are humans, they invariably try to claim this chance outcome resulted from a winning system that they will sell to you for some princely sum. More here: http://arachnoid.com/equities_myths http://arachnoid.com/equities_myths > Pointing that out X is hard and most people fail is a tautology, it's true of all difficult professions. Yes, but there's a qualitative difference between "hard" and "impossible".
  - throwawaymsft 13y ago
    You're basically saying investing is random chance. Ok. What is the p-value that Warren Buffett's random investment plan outperforms the market 39/47 years? http://finance.fortune.cnn.com/2012/02/25/buffett-berkshire-hathaway-results/ http://finance.fortune.cnn.com/2012/02/25/buffett-berkshire-... If a drug beat a placebo in 39/47 experiments, would it be approved by the FDA? :-) There are investors who get lucky, and there are investors with sound strategies. The notion that every winning strategy gets immediately and flawlessly applied by every actor in the market is a fantasy world populated by homo economicus.
piercebot 13y ago
I actually just launched http://fxmachine.com http://fxmachine.com with my co-founder, and so far, it looks like our system will enable anybody to achieve a sustainable income without any active involvement. We're trading on live data (not just making claims based on forward tests) without any human involvement, though human intervention and the ability to recognize trends could have saved some of the trades that ended up being losers. Still, we're looking at sizable gains with a hands-off approach (maybe you'll need to re-train the system every year, but even that can be automated). We've now run into the problem of telling the world about it; you'd think that 40% annual returns would have large institutions knocking down the door to give us our millions. So it goes!
- ep25 13y ago
  40% returns seems like a lot. Your quote, "FX.Machine builds profitable trading strategies by learning from historical data", is true for most of the strategies. What makes your strategy different? I would think that many people have tried both statistical and machine learning methods. I do not hear about any 40% returns from them. Your claim of 40% returns makes me doubt your testing strategy. Your forward test shows only 7.9% increase till now. There are a whole set of backward tests missing and a lot of information missing to consider your strategy seriously. For example, how is the risk being measured? Is it drawdown, Sharpe ratio etc?
  - piercebot 13y ago
    Thanks for your questions! Feedback like this really helps us. To your first point about our development strategy: we used genetic programming, and tried to apply novel strategies for which there wasn't much of a precedent in financial applications. To your second point, re: our testing strategy: I will concede that we only have 2 months of live trading data, but so far it corresponds well to the behavior we were seeing in our forward tests (what we call the data that the system was not trained on). We trained our system on 10 years of data (2001 - 2011) with two years of forward tests (2012 and 2013) for evaluating its effectiveness (and to verify that our algorithms have not been overtrained to fit the testing data set). Our forward testing involved taking the same data we would have received from our financial institution and feeding it through the algorithm to see what trades it makes. Having proven our algorithm worked with forward tests, we hooked it up to live data to get real results. So far, so good! To you third point--risk--we need to explain how our algorithm trades. We've trained our system to recognize patterns such that it will open a trade with a stop-loss and a take-profit. Because the take-profit and stop-loss are preconfigured, our system doesn't need to monitor data feeds with a time resolution of “real time” to make decisions; the onus is on the brokerage to close winning and losing trades. The lot size of the trade is calculated such that a losing trade (the price of the currency pair reaching the stop-loss) will incur a loss equal to the risk. So at a risk of 2%, a losing trade on a $1000 account will bring the account value down to $980. Winning trades earn double the risk, so a winning trade on an account of $1000 at 2% risk will increase the account value to $1040. With all this in mind, we claim 40% annual profit because our live trading exhibits patterns similar to our forward tests, and while our forward tests exceed 40% annual profit, we're extrapolating our two months' worth of live testing performance out to the rest of 2014. There's a good chance that this number will change in the coming months. We will revise it up or down accordingly. It's possible that our system will need to be used "in the wild" for more than just two months in order for people to take us seriously. If that's the case, I am happy to continue dogfooding FX Machine; so far, it’s been a profitable experience :) Thanks again for your great questions. We’ll use questions like these to build an FAQ section on the site!
zvrba 13y ago
> You really have very little chance of success unless you're doing this full time Heh. I also wanted to play with algorithmic trading, but before doing so, I got a book "Trading and exchanges" by Harris, which was recommended by somebody on reddit. I have read it only halfways and realized two things: 1. I'd have to do trading (and related activities) as a full-time job in order to be successful (i.e., earn money in the long run). 2. I'd need to spend at least a year's equivalent of a full-time job on learning the necessary background math and algorithms. I.e., I'd need to quit my job (which I quite like), only to replace it with another set of daily duties.
- cpwright 13y ago
  This is true. I think that people should have the capability of being successful, but only if they do approach it like a full-time job. That doesn't, however, guarantee success, even a large operation like the last one I worked for can fail. If it were easy, and everyone could do it and make as much money as working full-time, without actually working full-time; then everyone would.
adamcanady 13y ago
I'd love to talk to you about your algorithmic trading experience. Can we get in touch sometime?

by gbasin 13y ago

yarou 13y ago

In other words, there's no easy way to get rich. There is always pain involved, and people looking to get rich quick in financial markets are probably better off learning how to play poker.

breischl 13y ago
Because playing poker is a much easier way to make a sustainable income! Hm... actually, it might be. At the very least you certainly don't have to shell out as much for software.
- gizmo686 13y ago
  Also, in zero sum games like poker and investing, the real question is how much better then the competition you are. In investing, you are up against some really good competition. In poker, you can play against a lot of recreational players, who are could be far less skilled then you. With online poker, you can play many low value hands in parallel to get even easier competition.
  - gnaritas 13y ago
    That depends on where you invest, all markets are not equally competitive.
lutusp 13y ago
> In other words, there's no easy way to get rich. Of course there are -- very easy ways. But there's no reliable easy way to get rich. > people looking to get rich quick in financial markets are probably better off learning how to play poker. If we eliminate "quick", then not true. All one needs to do is invest in an equity index fund and patiently wait decades while ignoring the dubious claims of investment counselors. It's very reliable. With respect to "quick", that also happens but with much less reliability. Consider that a blind computer program randomly flipping coins, with no strategy at all, will enrich a small percentage of its accounts by chance alone. This works for people too, but it's a rare, chance outcome, not any kind of strategy. More here: http://arachnoid.com/equities_myths http://arachnoid.com/equities_myths
- yarou 13y ago
  The only case where a completely random strategy works is if there are black swan events occurring at equally random intervals. I agree on the buy-and-hold index fund advice.
  - lutusp 13y ago
    > The only case where a completely random strategy works is if there are black swan events occurring at equally random intervals. It depends on how you define "works". A random strategy doesn't work at all on average, it can only be said to "work" for the 1/2 of the investors that by chance fall above the average. And a random sequence is by definition a series of black swans. Unless you're saying that a black swan can only be an extraordinarily unlikely occurrence, in which case all we need do is wait a little longer for the improbable but eventually certain outcome that will meet anyone's definition of black swan. There are 23 people in a room talking. Pretty quickly two of them realize they have the same birthday. Is that a black swan? After all, there are 365 1/4 days in a year -- how unlikely is it for two of 23 random people to have the same birthday? Is it 23 / 365.25 (6.2%) or is it more or less likely? My point? Not all apparent black swans are really black swans.

oofabz 13y ago

I agree that day trading is a terrible idea, but how do you feel about laymen investing with a buy-and-hold strategy? If you buy large cap stocks and avoid making trades there is not much risk. This kind of strategy enables laymen like myself to do about as well as the market, without paying a middleman such as a mutual fund.

gbasin 13y ago
You're probably leaving most of the diversification benefit (which is the only edge you really have, unless you're assuming a fat equity risk premium haha) on the table unless you're a pro at that, as well. I think some of the newer automated-investment services are OK at building portfolios, although I would personally want a lot more exposure to other currencies/markets than my home (see: Home Country Bias)
lutusp 13y ago
> ... how do you feel about laymen investing with a buy-and-hold strategy? The answer is that buy & hold is a very reliable way to grow your capital, and it does without the services of investment advisors and brokers, which is why they don't want you to find out about it. On average, buy & hold investors do better than those who enlist the help of brokers or who become day traders (who on average do worse than anyone else). For actual evidence, one need only examine the outcome of the Wall Street Journal dartboard contest, which compared expert equity picks to random picks. The expert picks weren't sufficiently better than random picks to justify the broker fees, and this outcome went on for years. http://www.investorhome.com/darts.htm http://www.investorhome.com/darts.htm Quote: "... the performance of the pros versus the Dow Jones Industrial Average was less impressive. The pros barely edged the DJIA by a margin of 51 to 49 contests. In other words, simply investing passively in the Dow, an investor would have beaten the picks of the pros in roughly half the contests (that is, without even considering transactions costs or taxes for taxable investors)."
- sopooneo 13y ago
  I read these sorts of outcomes periodically and it always makes me wonder how on earth managed funds stay in business? How can an industry that does no better than chance on average continue to exist?

minimax 13y ago

I come from a similar background (automated trading) but have the opposite opinion. More people ought to understand how the markets work. One good way to learn is to trade a small account. Yes you will probably lose a little money (or fail to beat the indexes) but you will also come away with a much better grasp of markets and trading (and hopefully also risk management). If you look at a typical discussion of trading here on HN you will see lots of totally uninformed hyperbolic assertions about what goes on in the market. How everything is rigged and how corrupt the players are. I think trying to scare people out of the markets only promotes that kind of thinking.

lutusp 13y ago
> If you look at a typical discussion of trading here on HN you will see lots of totally uninformed hyperbolic assertions about what goes on in the market. How everything is rigged and how corrupt the players are. Yes, one does see such remarks, but an excellent counterargument is almost never heard-- and that is that (a) business leaders aren't stupid and (b) if the equities market was really significantly rigged or inefficient, these people would refuse to raise capital using equities. The fact that some of the most skeptical, cautious people in existence, people with plenty of practical experience, are willing to fund their businesses with equity capital, means that equity trading is substantially fair and that the efficient market hypothesis is at least approximately true.
- gnaritas 13y ago
  > The fact that some of the most skeptical, cautious people in existence, people with plenty of practical experience, are willing to fund their businesses with equity capital, means that equity trading is substantially fair and that the efficient market hypothesis is at least approximately true. That's a pretty bold claim. Given the financial crash of 08, from what I can tell the EMH has been thoroughly debunked. Markets are not efficient and all data is not priced in. Information is not absorbed quickly into the market so inefficiencies crop up everywhere all the time, those are the profit opportunities that traders make a living off of. If EMH were correct, the systematic risk that crashed the market could not have occurred. Remember, it's a hypothesis, not a theory.

gnaritas 13y ago

Everything you said could practically be applied to any skilled profession. Being an X is hard, 99% of people fail at X. What makes trading any harder than programming or engineering or abstract mathematics or physics? Successful traders exist, plenty of people trade for a living. People have to try something to see if it's something they're good at and most people aren't good at most things. Pointing that out X is hard and most people fail is a tautology, it's true of all difficult professions.

lutusp 13y ago
> What makes trading any harder than programming or engineering or abstract mathematics or physics? That's easy to answer -- if you're very smart, you will do better in math and physics, and the positive correlation between intelligence and success actually has meaning. But in equities trading, being very smart does no good at all, and might even represent a handicap. The reason? Equity pricing is mostly random noise, very high entropy. Many very smart people have tried to model and then beat the market, and (apart from chance outcomes) no one has succeeded in the sense that they located a reliable, describable "method" for it. Also, if in principle someone discovered an actual winning system, by publishing the system he would destroy its effectiveness (because once a "system" is put into practice, once everyone uses it, it loses its effectiveness). Obviously for a random collection of investment schemes, half will do better, and half worse, than the average market, but the half that do better will naturally enough claim the outcome resulted from their investment genius -- even if they're smart enough that they should know better. I can use a computer to model a random market and random investors, using random price changes and random trades, and not surprisingly, half the investors will do better than the average outcome. What is surprising is that, when the above-average investors are humans, they invariably try to claim this chance outcome resulted from a winning system that they will sell to you for some princely sum. More here: http://arachnoid.com/equities_myths http://arachnoid.com/equities_myths > Pointing that out X is hard and most people fail is a tautology, it's true of all difficult professions. Yes, but there's a qualitative difference between "hard" and "impossible".
- throwawaymsft 13y ago
  You're basically saying investing is random chance. Ok. What is the p-value that Warren Buffett's random investment plan outperforms the market 39/47 years? http://finance.fortune.cnn.com/2012/02/25/buffett-berkshire-hathaway-results/ http://finance.fortune.cnn.com/2012/02/25/buffett-berkshire-... If a drug beat a placebo in 39/47 experiments, would it be approved by the FDA? :-) There are investors who get lucky, and there are investors with sound strategies. The notion that every winning strategy gets immediately and flawlessly applied by every actor in the market is a fantasy world populated by homo economicus.

piercebot 13y ago

I actually just launched http://fxmachine.com http://fxmachine.com with my co-founder, and so far, it looks like our system will enable anybody to achieve a sustainable income without any active involvement. We're trading on live data (not just making claims based on forward tests) without any human involvement, though human intervention and the ability to recognize trends could have saved some of the trades that ended up being losers. Still, we're looking at sizable gains with a hands-off approach (maybe you'll need to re-train the system every year, but even that can be automated). We've now run into the problem of telling the world about it; you'd think that 40% annual returns would have large institutions knocking down the door to give us our millions. So it goes!

ep25 13y ago
40% returns seems like a lot. Your quote, "FX.Machine builds profitable trading strategies by learning from historical data", is true for most of the strategies. What makes your strategy different? I would think that many people have tried both statistical and machine learning methods. I do not hear about any 40% returns from them. Your claim of 40% returns makes me doubt your testing strategy. Your forward test shows only 7.9% increase till now. There are a whole set of backward tests missing and a lot of information missing to consider your strategy seriously. For example, how is the risk being measured? Is it drawdown, Sharpe ratio etc?
- piercebot 13y ago
  Thanks for your questions! Feedback like this really helps us. To your first point about our development strategy: we used genetic programming, and tried to apply novel strategies for which there wasn't much of a precedent in financial applications. To your second point, re: our testing strategy: I will concede that we only have 2 months of live trading data, but so far it corresponds well to the behavior we were seeing in our forward tests (what we call the data that the system was not trained on). We trained our system on 10 years of data (2001 - 2011) with two years of forward tests (2012 and 2013) for evaluating its effectiveness (and to verify that our algorithms have not been overtrained to fit the testing data set). Our forward testing involved taking the same data we would have received from our financial institution and feeding it through the algorithm to see what trades it makes. Having proven our algorithm worked with forward tests, we hooked it up to live data to get real results. So far, so good! To you third point--risk--we need to explain how our algorithm trades. We've trained our system to recognize patterns such that it will open a trade with a stop-loss and a take-profit. Because the take-profit and stop-loss are preconfigured, our system doesn't need to monitor data feeds with a time resolution of “real time” to make decisions; the onus is on the brokerage to close winning and losing trades. The lot size of the trade is calculated such that a losing trade (the price of the currency pair reaching the stop-loss) will incur a loss equal to the risk. So at a risk of 2%, a losing trade on a $1000 account will bring the account value down to $980. Winning trades earn double the risk, so a winning trade on an account of $1000 at 2% risk will increase the account value to $1040. With all this in mind, we claim 40% annual profit because our live trading exhibits patterns similar to our forward tests, and while our forward tests exceed 40% annual profit, we're extrapolating our two months' worth of live testing performance out to the rest of 2014. There's a good chance that this number will change in the coming months. We will revise it up or down accordingly. It's possible that our system will need to be used "in the wild" for more than just two months in order for people to take us seriously. If that's the case, I am happy to continue dogfooding FX Machine; so far, it’s been a profitable experience :) Thanks again for your great questions. We’ll use questions like these to build an FAQ section on the site!

zvrba 13y ago

> You really have very little chance of success unless you're doing this full time Heh. I also wanted to play with algorithmic trading, but before doing so, I got a book "Trading and exchanges" by Harris, which was recommended by somebody on reddit. I have read it only halfways and realized two things: 1. I'd have to do trading (and related activities) as a full-time job in order to be successful (i.e., earn money in the long run). 2. I'd need to spend at least a year's equivalent of a full-time job on learning the necessary background math and algorithms. I.e., I'd need to quit my job (which I quite like), only to replace it with another set of daily duties.

cpwright 13y ago
This is true. I think that people should have the capability of being successful, but only if they do approach it like a full-time job. That doesn't, however, guarantee success, even a large operation like the last one I worked for can fail. If it were easy, and everyone could do it and make as much money as working full-time, without actually working full-time; then everyone would.

adamcanady 13y ago

I'd love to talk to you about your algorithmic trading experience. Can we get in touch sometime?