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permanentjaun · 21-10-2006, 19:05

Hello all,

Here's the next of my open discussion threads. This time it is about automated trading systems. I'll start off by saying I do believe automated trading systems can work, but with help. In time I think I will be able to hand out business cards that title me as a Foreign Exchange Currency Automated Trading Systems Manager. Sounds nice right? So my belief is that automated trading systems can work, but will need to be monitored and tweaked to maintain efficiency and reliability.

This thread is to discuss why most automated systems fail however. It's to discuss their limitations and their abilities. Let me begin the discussion.

A computer can not make discretionary decisions. In my opinion this should rule out many indicators that need much discretion in making a decision based on them. Essentially, eliminate any indicators that do not follow price discreetly. RSI, CCI, MACD, stochastics, fibs, bollinger bands, nearly all indicators should be thrown out. Why do I say to eliminate just about every indicator out there? They don't follow price. They can form divergences. They can reach levels where their mathematical formulas are maxed out, such as in RSI, and can give neutral signals of being overbought and oversold. I believe it is asking too much of a computer to decide what to do in these situations.

Can a computer effectively recognize divergences? Chart patterns? It would add more to the confusion of the system when you must tell a computer by how much an indicator must have diverged before entering a trade. At what point does the divergence become effective in predicting a future market movement? If MACD diverges down for 2 periods is that a long enough divergence to base a decision? 5 periods? Perhaps only when it has diverged for 10 periods. There are many situations that must be accounted for. This is setting up for more possibilities for the system to fail.

Many times we look at several indicators and decide to throw out one of them since another indicator is giving more reliable signals. Can a computer decide which of these indicators to use? I will assume that to program a computer to do so would be too much of a project to profficiently carry out a trading system. There would be too many "what if" situations where you're only setting up the system to fail.

I will go so far as to say support/resistance levels should be thrown out of the equation. Get rid of fibs and other similar tools. There are plenty of times that prices explode through support/resistance levels easily. Even if resistance/support is confirmed as movement is stalled, the trend can continue through said levels. To program a computer to try and recognize support/resistance levels is just creating another "what if" situation for it to fail at. Can you correctly tell me why sometimes support/resistance levels are held while other times they mean nothing? If you can't do so with 100% accuracy, how can you tell that to a computer which has no thought process?

Thus, I believe that the way to program a trading system is to keep it simple. The system needs something that follows price solely since that is what we are concerned with predicting. We need something a computer can make decisions off of such that the indicator does not get maxed out, follows price, doesn't diverge, and is indiscretionary.

My conclusion is to use moving averages. They are based directly off of price, can not get maxed out, do not diverge, and computers can easily make decisions off of them.

Many will say that this is too simple to base a trading strategy off of. In fact, it can be as complicated as you want, for yourself. Do you create MA's off of the open, high, low, or close? Are they weighted, simple, exponential, triangular, etc.? Do you create it off of price closing above/below a MA or when another MA crosses? What period do you set the MA for? What time frame? I think those options right there are enough for you to think about. The point is that you create the system such that all the decisions were made by you. The computer can easily tell you when a cross or price movement will have triggered the trade. It doesn't need to recognize chart patterns, divergences, etc.. It simply needs to monitor price. The difficulty in deciding has been done by you.

21-10-2006, 19:05	#1
permanentjaun level 1 Join Date: Sep 2006 Posts: 45 Downloads: 0 Uploads: 0 Rep Power: 2	Automated Trading Theory Discussion Hello all, Here's the next of my open discussion threads. This time it is about automated trading systems. I'll start off by saying I do believe automated trading systems can work, but with help. In time I think I will be able to hand out business cards that title me as a Foreign Exchange Currency Automated Trading Systems Manager. Sounds nice right? So my belief is that automated trading systems can work, but will need to be monitored and tweaked to maintain efficiency and reliability. This thread is to discuss why most automated systems fail however. It's to discuss their limitations and their abilities. Let me begin the discussion. A computer can not make discretionary decisions. In my opinion this should rule out many indicators that need much discretion in making a decision based on them. Essentially, eliminate any indicators that do not follow price discreetly. RSI, CCI, MACD, stochastics, fibs, bollinger bands, nearly all indicators should be thrown out. Why do I say to eliminate just about every indicator out there? They don't follow price. They can form divergences. They can reach levels where their mathematical formulas are maxed out, such as in RSI, and can give neutral signals of being overbought and oversold. I believe it is asking too much of a computer to decide what to do in these situations. Can a computer effectively recognize divergences? Chart patterns? It would add more to the confusion of the system when you must tell a computer by how much an indicator must have diverged before entering a trade. At what point does the divergence become effective in predicting a future market movement? If MACD diverges down for 2 periods is that a long enough divergence to base a decision? 5 periods? Perhaps only when it has diverged for 10 periods. There are many situations that must be accounted for. This is setting up for more possibilities for the system to fail. Many times we look at several indicators and decide to throw out one of them since another indicator is giving more reliable signals. Can a computer decide which of these indicators to use? I will assume that to program a computer to do so would be too much of a project to profficiently carry out a trading system. There would be too many "what if" situations where you're only setting up the system to fail. I will go so far as to say support/resistance levels should be thrown out of the equation. Get rid of fibs and other similar tools. There are plenty of times that prices explode through support/resistance levels easily. Even if resistance/support is confirmed as movement is stalled, the trend can continue through said levels. To program a computer to try and recognize support/resistance levels is just creating another "what if" situation for it to fail at. Can you correctly tell me why sometimes support/resistance levels are held while other times they mean nothing? If you can't do so with 100% accuracy, how can you tell that to a computer which has no thought process? Thus, I believe that the way to program a trading system is to keep it simple. The system needs something that follows price solely since that is what we are concerned with predicting. We need something a computer can make decisions off of such that the indicator does not get maxed out, follows price, doesn't diverge, and is indiscretionary. My conclusion is to use moving averages. They are based directly off of price, can not get maxed out, do not diverge, and computers can easily make decisions off of them. Many will say that this is too simple to base a trading strategy off of. In fact, it can be as complicated as you want, for yourself. Do you create MA's off of the open, high, low, or close? Are they weighted, simple, exponential, triangular, etc.? Do you create it off of price closing above/below a MA or when another MA crosses? What period do you set the MA for? What time frame? I think those options right there are enough for you to think about. The point is that you create the system such that all the decisions were made by you. The computer can easily tell you when a cross or price movement will have triggered the trade. It doesn't need to recognize chart patterns, divergences, etc.. It simply needs to monitor price. The difficulty in deciding has been done by you.