Do Automated Trading Systems Work?

[Norm]

Hello,

My understanding is that automated trading system can work if they are appropriate for the prevailing market conditions. This seems to make sense.

For example, an automated trading system that is biased toward going long will tend to work well during a market up trend and visa-versa. Additionally, a system that tends to take advantage of cyclic indicators will tend to do well in a sideways market.

If anyone has anything to add about the ability of automated trading systems to work, I would certainly like to hear it. For instance, if anyone actually makes a living off of such a system or has first hand knowledge of the use of automated trading by a financial institution, hearing about their experiences would be appreciated.

Norm

 

[psytrade]

Start with trend following CTAs every one of them has an automated system. Read the book Trend Following by Michael Covel and visit his site on the web. Lots of insight.

 

[Free Thinker]

https://www.tradestation.com/Discussions/Forum.aspx?Forum_ID=213

go here and read. lots of people on both sides of the fence.

 

[rarhoads]

I'm currenty running four systems that trade a variety of markets. Two basically trade with the trend and two basically trade counter trend. I've had pretty good success running all together as long as I follow the signals without any second guessing.

I know there are traders that do better trading by feel, etc. But for me a strict system approach seems to fit my personality best.

 

[mats]

I think there are 2 types of automated trading systems; technically based (technical analysis) and auto trading systems used by for example market makers.
The first might have some possibilities although I would absolutely prefer the other systems used by for example market makers (professional traders).
Disadvantage of first group is that with these types of systems you never know In what stage the market is at this moment, trending, non trending. Of course you can look back in time and base your systems on the past but that is not the main question.

 

[rufus_4000]

Quote from mats:

I think there are 2 types of automated trading systems; technically based (technical analysis) and auto trading systems used by for example market makers.
The first might have some possibilities although I would absolutely prefer the other systems used by for example market makers (professional traders).
Disadvantage of first group is that with these types of systems you never know In what stage the market is at this moment, trending, non trending. Of course you can look back in time and base your systems on the past but that is not the main question.

There are a few more types than that. Keep in mind that the hedge funds that run automated trading systems do so in the "non-MM" category, they can not market make by definition, and yet they still run statistical arb models, inter-market spreading, or just outright position taking plus hedging, etc. I have seen some very strange (and yet work!) combinations.

I think the sky is the limit as to the complexity of automated trading systems. And before anyone says "well hedge funds have $1B behind them", the few smaller ATS that are currently in production, have around 1M or so in capital only, which is clearly within reach of a retail client, or a small group.

 

[newbunch]

Quote from mats:

I think there are 2 types of automated trading systems; technically based (technical analysis) and auto trading systems used by for example market makers.

Uh oh! My automated system doesn't fit into either of those categories.

 

[stephencrowley]

Nor does mine. My ATS is continually self-adjusting and makes no assumptions about "market conditions" whatever that may be. Scalping/Hedging/Statarb/prediction. Yes, it does make directional picks, but uses its uncertainty estimates to determine the "optimal" hedge.

Quote from newbunch:

Uh oh! My automated system doesn't fit into either of those categories.

 

[newbunch]

Quote from stephencrowley:

Nor does mine. My ATS is continually self-adjusting and makes no assumptions about "market conditions" whatever that may be. Scalping/Hedging/Statarb/prediction. Yes, it does make directional picks, but uses its uncertainty estimates to determine the "optimal" hedge.

That sounds interesting, though I'm not entirely sure what you do.
My system is a long-term fundamental/technical system trading the S&P500 and 10-year bond. Yes, it uses technicals as rufus said, but the key is combining the two. Using just the fundamentals or technicals gives you limited, yet still positive results. Combining the two is how I increase returns and reduce risk to make it really worthwhile.

 

[stephencrowley]

Sometimes, I'm not even sure what I do. My system makes very-very short term 'predictions' about direction and volatility and also generates uncertainty estimates along with the predictions. Volatility is quite easy to predict, direction is another thing. I use the uncertainty estimates to take the opposite side on another highly correlated symbol. I have a strict stop-loss policy where I set the maximum loss based on the volatility prediction so I don't get stopped out by random flucuations and my 'winning' side has a trailing stop loss based on volatility as well. The hedging ensures that my maximum loss is massively reduced and the system shuts itself down if it starts performing badly. I can rest easily this way.

Quote from newbunch:

That sounds interesting, though I'm not entirely sure what you do.
My system is a long-term fundamental/technical system trading the S&P500 and 10-year bond. Yes, it uses technicals as rufus said, but the key is combining the two. Using just the fundamentals or technicals gives you limited, yet still positive results. Combining the two is how I increase returns and reduce risk to make it really worthwhile.