Have you ever wondered about automating your trading strategy?
Probably every trader knows the benefits of automating their strategy but actually doing it might seem very overwhelming. I mean you have to either know how to code or hire someone who does. But even when you hire will they do it right? They need to know about trading, and finding a person like that can be tough… Oh my god… where do you even start…?
Well in this blog post I will put you on the right track. I will talk about how to get your strategy ready for automation, key points to consider before automating your strategy and give some advice on how to automate it with ease. Let’s go!
Don’t like reading? Watch the video instead!
Alright, so I assume you already know what automation is and why its the single best thing you can do for your trading. If you don’t – watch this video that explains all that. Now, let’s start with a broad overview first of what kind of trading strategies can be automated.
- The single easiest trading strategy to automate is always a purely technical trading strategy that follows strict rules and uses technical analysis indicators to analyze the market. The automation process for such a strategy is going to be the fastest and the resulting algorithm will be the most reliable. It will also be easily backtestable and will have the most trustworthy backtest results.
- The second on the list will be a Price Action based trading strategy. Technically speaking I guess this falls under a technical strategy type as well but the automation process of these two is different hence I separate these two into their own groups. Price action trading strategy can be rather easily automated as well, provided that it uses the most basic price action principles and bar patterns. If it goes deeper into recognizing patterns that are not strictly outlined by mathematical rules that might introduce a level of difficulty automating such a strategy since then Artificial Intelligence algorithms will have to be involved to perform such pattern recognition. The drawdown of this is that it will be more pricey to automate, will take more time and the backtests will not be as trustworthy since AI keeps learning and results might change over time.
- The third on the list is a fundamental trading strategy. Gladly nowadays we have access to a bunch of fundamental data online and we have sophisticated enough artificial intelligence algorithms that are capable of parsing out such data and making sense of it. So automation of fundamental trading is not completely impossible. Depending on the depth of fundamental analysis used the difficulty of automation can vary from very easy to extremely complex, but it is possible to automate such a strategy nonetheless. It will be the most pricey to automate and will be incredibly complicated to backtest because fundamental historical data at times is hard to find and again since AI might be involved results might vary depending on how well the AI is trained. The key point here is that it’s not impossible tho!
- And finally a discretional trading system. Discretional trading is a type of trading where a money manager uses his long years of expertise to have an evolved sense of the market and uses intangible information or hunches to perform the trades. This type of strategy is practically impossible to automate because there usually is no outlined ruleset for performing the trades. So if you are trading discretionally and still want your trading automated you really need to start narrowing down your trading strategy to a more technical approach, figure out what patterns, formations or fundamentals cause your hunches to go off and try to put it in a strict ruleset. That way at least a part of your trading could be automated.
Alright, now that we went over the strategy types lets talk about how to best get ready for automating your strategy. To understand strategy automation we need to understand how computers think. Now I know this is off-topic but to even better understand the computer language you can watch this quick 3-minute video.
To put it simply computers think in simple mathematical rules. It needs to be specifically instructed what to do when what kind of conditions are met. I.e. when moving average 50 crosses above moving average 200 – go long. This is one of the simplest types of conditions and is just an example to illustrate how you should start thinking about your trading. You can go more complex than that for sure, i.e. if in the last 5 days the ATR value kept increasing or if new higher high was made and the stochastic oscillator is above 80 then do this and that. You can also include things such as if the instrument has earnings coming up in the next 3 days don’t trade, or trade only then. Or if the underlying index opened with a gap up for the day then don’t take longs and so on. You can also include news related to the instrument or the portfolio and do something when good or bad news comes out. So before you even start thinking of automating your strategy you need to lay your strategy down as a very strict trading plan. As a set of rules that a robot can follow. Once your plan reaches this point it can be fully automated and backtested and optimized and statistically evaluated and all the good stuff that comes with automation.
It is noteworthy that certain things make automation harder in some cases. For example a very small timeframe of execution, i.e. less than a minute or even worse – tick-based execution. This turns a trading strategy something close to a high-frequency trading bot which is hard to backtest and can cause critical delays in execution if network bandwidth is limited. Or if you use custom proprietary indicators that have closed source code which values cannot be accessed via code. However, if you decide to automate your trading strategy using the Diamond Strategies service we have solid workarounds to solve these issues.
Regardless, it is best to keep the analysis timeframes at or above 15-minute bars and if possible avoid any highly complex and proprietary technical indicators.
I would like to note is that my team is working hard on bringing such functionality of automating your own strategies using the Diamond Strategies software. It is not yet available, but if you want to stay in the loop on when these features get added, make sure to subscribe to our YouTube channel or sign up for our newsletter.
Our software will solve all the issues mentioned above, will enable you to execute on incredibly large portfolios, has optimization, backtesting features with incredible robust statistical analysis features included and so on.
Anyhow, let’s move on. Now the bigger issue comes when you cannot automate things yourself. That’s when you will need to hire someone to do that. And hiring a developer for this process can be rather tricky since it requires a very specific skillset that is usually hard to find. Even if you find a good developer with the necessary skills the next obstacle will be communicating your trading strategy to him or her properly and making sure that you didn’t make any mistakes when getting your plan ready for automation. Now when looking for developers for the job it is best to look for someone who understands trading and preferably has some trading experience. You can find people like that over at Fiverr or other freelance websites, but often enough they are low-level Indian talent which may be hard to deal with (no offense to Indian devs, it’s just my personal experience). Anyhow if you have to resort to such measures, make sure to read the responses and recommendations other people had about the developer and see if you have the chemistry needed to work together during the first interview.
Let’s continue, most developers that have little to do with trading might find it rather difficult to understand your specific needs and to give advice on how to solve issues that pop up during the automation process. That’s why I launched the Diamond Strategies automation service. We have a specialized team of experts that will take you through the automation process from start to finish. We will analyze your current trading approach, help you prepare for automation making sure you don’t make any mistakes in the process. All of this will be done discretely, you will have NDAs signed from the Diamond Strategies side to keep your trading plans private. We will solve any obstacles that come up during the preparation process, and make sure that everything is thought of when performing the automation. Such as risk management strategies, propper execution, implementation of any custom analysis indicator and so on. With this, you will also get the Diamond Strategies software that enables you to then improve your trading strategy yourself after automation, find optimal trading parameters, optimal portfolios to trade and will offer you advanced proprietary statistical methods to turn your trading into a money-making machine. The automation will be performed directly from the Diamonds Strategies software that you will have full control over.
Alright, now I do hope you learned something from this blog post. As always if you want to join the community of people who trade using science, make sure to subscribe to our youtube channel and sign up for our newsletter. And if you are interested in automating your strategy, head on over to the Diamond Strategies website where we have a very short quiz prepared for you that you can complete in under 3 minutes and evaluate how ready your current strategy is for automation. After completing the quiz you will get tangible advice on how to improve your trading plan so that it could be better automated as well. Alright, that’s it for this time.