Trading with automation (with IB)

[jarjar]

It's not real dollars but a paper trading account, that's why you don't see much emotions involved. Losing that much real dollars would definitely take a toll on the trader's mental state.

Yea the first post would be better if it made clear that this is a demo account trading, perhaps in bold. This thread is a lot less interesting now.

Simply because from the perspective of a programmer designing software that can excel at a simulation and designing software that can win in the real world are actually much further apart then appears.

But to be fair there is probably real clients using GBOT that are using similarly large accounts. Just they wish to be private. So it IS indeed nice to see simulations.

 

[fullautotrading]

Yea the first post would be better if it made clear that this is a demo account trading, perhaps in bold

Hello jarjar,

You may have missed some posts. This thread is mostly targeted to IB users and on each screenshot, and official report, I have been displaying all the time the account number. It's well known that accounts starting with "D" are paper trading accounts.

In addition to that, I have also made quite clear in this post in response to recession2016 the reasons why I am not going to show anymore real $ accounts.

[In brief, it happened in one journal that when we were still a relatively small DD, a couple of clueless idiots started screaming, thus causing a real investor to get scared. So double damage: my time and the investor's money. Note that just a few days after giving up, all the investment we had accumulated (on a strongly decaying ETF) would have worked just fine, giving a remarkable profit.]

Anyway, the question does not really matter because, as far as automation is concerned, an IB paper trading account works exactly like a real $ account. I understand that you are not familiar with these IB accounts, but that is the way they work. In addition, the application behaves exactly the same, regardless of the kind of money being used.

The only possible difference is that a real $ account will usually do slightly better, because the fills are far better and the execution faster. Our positions would also be negligible (compared to the instrument liquidity) to affect anyway the mkt. So on a real $ account you would normally see exactly the same results, or better.

The only thing that can change is the "emotional" part (on the user's side), as d08 pointed out. But that is a good reason to use automation and a methodology. If one wants less risk, just reduce the sizing and consider carefully the instrument volatility. If one wants no risk, just do not trade. If a trader gets scared on the first DD and has no real grasp of what it is going on, there is no application or automation which can help, because he will inevitably shut it down, sooner or later, and of course it will happen when in loss.

The point remains that risk = DD = "investment" (provided that no trading information is lost) = (potentially) future profit. There are no profits without risk. At least, not in general and long term (note that we have executed so far over 6,400 lmt fills). How much absolute risk to take is a fund manager decision, based on capital and other circumstances.

 

[fullautotrading]

It's not real dollars but a paper trading account, that's why you don't see much emotions involved. Losing that much real dollars would definitely take a toll on the trader's mental state.

The key word here is "Losing". Yes, you are right if you have reasons to see that as a "loss".
If you see it as an "investment" the perspective changes.

Two though-provoking questions:

1) Whose quote is this:
“Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market.” ?

2) How do you differentiate a "loss" from an "investment" ?

 

[sysdevel99]

The point remains that risk = DD = "investment" (provided that no trading information is lost) = (potentially) future profit. There are no profits without risk. At least, not in general and long term (note that we have executed so far over 6,400 lmt fills). How much absolute risk to take is a fund manager decision, based on capital and other circumstances.

Do you think this is worth the time though?
I'm not sure I'm looking at this correctly but you've about 7 month of trading history, a net gain of 130k, a max draw down of probably 600-700k (not sure I'm reading your graph correctly, just guessing the P&L drawdown there). On top of that you have a significant amount of time invested (for the trade logic and the pretty pictures/graphs).

I've written and traded automated (with IB) for a long time, it seems that you either don't have much of your own money at stake or you've balls of steel but if this was my money (even just 1/10th of the size, I'd shut the system down with a 70k draw down and a current 7 month net gain of 13k). Seems like a waste of time and commissions to me.

 

[fullautotrading]

even just 1/10th of the size, I'd shut the system down with a 70k draw down and a current 7 month net gain of 13k

Hello sysdevel99,

Well, our peak DD so far was under 45% and +130K is not the "final" result (just as +415K wasn't either). As explained, there are phases when you "load up" and phases where you make a (possible) profit.

If you have to stop, you stop in profit, and not in an "investment" phase. If you are trading even shoes, do you quit your business just after buying a new large stock (intended for resale) and throw the shoes in the sea ? Really ? Well sure, it can happen if you have a breakdown and want to retire for good.

I might justify the peak DD by reminding the precise circumstances when it was achieved ("manual" overload of SCO). However, I do not even want do that, as I firmly believe that if you understand why and when your DD is an "investment", you must be willing to take it.

Do you think this is worth the time though?

W.B., in the quote above, has already answered your question. Not to mention that we are talking of instruments with much greater leverage (FUTs) or volatility (ETFs) than simple stocks.

The popular % statistics for traders who lose and blow their accounts is pretty high (90%+ is not uncommon). What do you think was their DD ?

And what about the other ones? Ok sure, they have being making a steady 20% return for years, with just max 15% DD, trading futures and ETFs!

The problem is just that: that the web is full of selectively-reported results (=deceptions, or useless curve-fitted backtests) which give a false representation of what is the most common reality of trading. For this reason, I will never shy away for showing large DD when they happen, because that is how it normally works. I would add more, that I am probably even inclined (at least at a subconscious level) to show it in all its magnificence. This is because, as a developer, I want to avoid at all costs the particular investors who have been mislead to unrealistic expectations about results, or are undercapitalized, as this would result in nothing good for both sides.

Anyway, for those who can show steady high returns with low DD, with meaningful capital, they are welcome to discuss their developments and show their IB paper trading journal here on ET, with the account number and full broker report, as I am doing in full transparency. I have not seen many of those around...

 

[jk90029]

7 months is too short to say anything.

Prove at least 3 years or 10 years of record.

If you make 20% annually (such as 1.2^10 = 6.191736 = 6.2 tiimes for 10 years), then you are sure to make 1.2^50 = 9100.438 = 9100 times.

At age of 25, start 10K or 100K to make 91000K= 91M might be the best at age of 75.
It is also the story of Buffets.

 

[fullautotrading]

7 months is too short to say anything.

Prove at least 3 years or 10 years of record.

It is also the story of Buffets.

Hello jk90029,

I have no problem to stay on ET for the next 3 years or even 10 years. Well, maybe ET, I and Baron may be a bit different at that time
Not that I am planning to die, but I may not be able to be doing flips at that time

The real point is however that even if I do better than W.B. in 10 years that still will not mean anything for most investors.

In my view, ideas are more important than results. Because good results without supporting ideas are, as I view it, either fake or, at best, a random fluke.
Further, as a developer, I must continue having a vision even through bad results, just for the same reason why the first airplanes were continuously falling from the sky, even though the general concept was right.

Here, there is a general concept, and it is the "preservation and use of trading information". The implementation of the concept may be another matter though, just as making a flying design may be not trivial (both technically and in terms of investment), even knowing perfectly, in concept, why planes fly.

The only way to have a chance (so it's a necessary but not sufficient condition) to remain consistent is to understand and be willing to ride the trading ideas and have enough capital to sustain the investment. Without that, you can even have 100 years of extraordinary success, and still mean nothing.

Having said that, note also that, technically speaking, in performance evaluation, the frequency of trading is also important, in addition to timespan. In fact, for instance, even curve fitting, in backtest, a higher frequency system is more difficult, while it's very easy to curve fit a low frequency one. On the other hand, there are people who don't make our 6,400 lmt orders (so far) in all their lifetime...

 

[d08]

If you have to stop, you stop in profit, and not in an "investment" phase. If you are trading even shoes, do you quit your business just after buying a new large stock (intended for resale) and throw the shoes in the sea ? Really ? Well sure, it can happen if you have a breakdown and want to retire for good.

Comparison with a shoe salesman isn't correct. If you bought shoes then the shoes have value and it's not a loss, you can sell the shoes back for almost no loss (shoes rarely lose 50% of value in days or weeks). If you're in a drawdown then the market value of the instrument has gone down, you cannot sell the investment back for almost no loss.

I've suffered a big DD recently, around 30%. But even my smallest annual return is more than this. If I returned 20% per year with 30% drawdown, I'd consider it a complete failure.

While you mention that your trading is highly leveraged, it should always be adjusted for risk. So if the instruments allow you to have very high leverage, you need to trade smaller - according to certain risk parameters.

 

[fullautotrading]

Comparison with a shoe salesman isn't correct. If you bought shoes then the shoes have value and it's not a loss,

When you buy your stock of shoes you are investing money for a possible future profit. Your shoes are in a warehouse waiting to be sold, and they may get damaged by rats, or a flood, or because a fire. Or maybe they go suddenly out of fashion, or... maybe everyone is now buying the Feiyue instead of your sport shoes because the Shaolin monks and top wushu practitioners wear them . This is analogous, in our approach, to not being able to use the preserved trading information.

Again you are mixing up a "loss" with an "investment". Instruments have drifts and of course you need to align yourself to them in order to maximize your chance to use (at least partially) your trading information. You are, however correct, that for most traders DD = "losses", because, especially the automated ones, in most cases do not have a mechanism to preserve and use information (experienced "discretionary" traders will usually compensate by using "intuition"). That is also why DD is so scary to many of them, because there is no recovery plan "built in" the strategy: money and information is gone, and that is it.

Given a decrease of risk capital, I define it as "investment" in the context of trading if: the relevant trading information has been stored, and it is practically possible to use it, at a future time, to obtain a profit; if the above condition does not hold, we have a "loss".

For instance, W.B. implicitly and intuitively is preserving and using trading information in his approach (and this costs him some DD), with the difference that he is limiting himself to the instruments he "understands" better. While, instead, I see, in an automated setting, the general concept better applied to instruments which for various reasons have a more "predictable" (or even "structural") drift.

If I returned 20% per year with 30% drawdown

If you are referring to me I have not returned 20% yet in this illustration. If we want to reason that way, we also touched +415K, which is almost 30% in less than 8 months. But this is not useful either. The time horizon of exactly 1 month or exactly 1 year is meaningless. You need to remain in the business for an undefined time, and you cannot tell the market how and when to fluctuate, and your phases of load ("investment") /profit are directed by the markets, not the calendar. Of course you can gradually withdraw your investment as you make a profit, and thus avoid further larger exposure, if you want to be more "relaxed" (but then, do not expect a "compounding effect").

Again, I consider the risk capital as a tool to get a result, and I am prepared to use it all (100%). If one has 10M and wants a max DD of 20%, just use 2M to trade. It's as simple as that. For me, the risk capital is there to be used.

So if the instruments allow you to have very high leverage, you need to trade smaller

As I mentioned earlier and as you say, if you want less risk, you may want to use smaller sizes. Although with futures, even the starting size of 1 contract can be too large for many undercapitalized traders. Leverage is not however the only a factor. Volatility is crucial too, 1 contract of a bond futures behaves completely different than 1 contract of silver. (Similarly the ETFs we have been using have monster volatility.)

 

[sysdevel99]

If you're in a drawdown then the market value of the instrument has gone down, you cannot sell the investment back for almost no loss.

fullauto - everyone has their own parameters on what makes them happy and how they want to trade. ET is full of haters and based on your responses you are quite defensive - don't look at this post as a hate post but it seems sometimes (with the fancy language of "investment phase") you're missing the forrest for the trees.

Think more basic - think you're trading a (possibly single) futures contract. If that contract has a huge draw down, that's not "an investment phase". That's not you pushing the market down either. That's simply bad timing. Easy as that. The market doesn't know you're "reloading", the market doesn't care about your time horizon - if you bought the future and it went down you could have bought the exact same future a little later at a significant discount. Looking at the draw down and correlating it to "the investment phase" is just sugar coating a bad entry. If your system is always early look how you can fine tune the entry to avoid these draw downs.