3 Reasons Traders Should use Algorithms and a Quick-Step Guide to Getting Started

“ Trading floors were once the preserve of adrenalin-fuelled dealers aggressively executing the orders of brokers who relied on research, experience and gut instinct to decide where best to invest.”

- Richard Anderson BBC News

No longer do trading floors belong to adrenalin-fuelled dealers aggressively executing orders from brokers who relied on research, experience and gut instinct to invest. The game has changed. The Wall Street elite, or in other words, the banks and hedge funds, are now using supercomputers armed with powerful algorithms programmed by PhD brainiacs to trade hundreds of stocks and currencies and in the process make boatloads of money.

No longer are powerful algorithms the preserve of the Wall Street Elite. Quant trading has come to main street and “ No longer are the average retail trader can now use that same powerful technology to track patterns or trends in trading behavior algorithms the preserve of the and create algorithms to predict future market movements. Wall Street Elite

Although these quantitative trading programs are the basis of all quickfire trades (also known as high-frequency trading [HFT]), in which positions are held for a matter of seconds, these programs are now being used in more traditional trading where the holding period can be days, weeks or months.

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No one has done the research, so we can’t be certain just how successful algorithmic trading is, but as Scott Patterson of The Quants says: “They have been around long enough now to assume they are extremely profitable. The vast majority of firms use quantitative trading, It drives almost everything that goes on on Wall Street.”

Their proliferation would certainly suggest so. Two of the biggest HFT firms, Tradebot and Getco, alone account for about 15%-20% of all equity trading in the US. As they are private companies, it is hard to know precisely how far their influence extends but a recent government-backed study in the UK estimated that between a third and a half of all shares trading in Europe, and more than two-thirds in the US, was done by algorithms, or Quant trading. “

The over-all point is that new technology will not necessarily replace old technology, but it will date it. Eventually, it will replace it. It’s like people who had black-and-white TVs when color came out. They eventually decided whether or not the new technology was worth the investment.” Steve Jobs

In the stock market, algo-trading (trading with an algorithm) is increasingly taking over the traditional way of trading as complex number-crunching algorithms work out what to buy and what to sell. Some estimates show up to 70% of Wall Street trading is now run by so-called black box or algo-trading.

Here are the 3 reasons why YOU should be trading with algorithms

There are many reasons why large hedge funds and mutual funds use quantitative trading systems to make trading decisions but the most important reasons for the average retail trader are:

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1. Trading with an algorithm eliminates trading anxiety

Emotion has always been, and will always be, the bane of a successful trading career. Even the best traders are plagued by emotions during a crucial trade because traders, before anything else, are still humans. Even if you have the best trading strategy, if emotions intervene at the most crucial point of a trade, all the best-laid plans can go awry. Quantitative trading systems eliminate such risks since it makes trading decisions based on mathematically tested ideal conditions.

When you trade with algorithms you will no longer:

• Change the rules for short-term satisfaction • Exit early or refuse to take a trade to avoid pain • React to news • Believe “I am a trader therefore I need to trade” • Think “my account is up so I can take on more risk”

• Fall into the rabbit hole called “solution mode” where you start looking for another indicator that will finally be “the one” • Start digging into financials for more data on a company or think, “if I just did more research I would be a good trader” • Believe you are not as smart as 99% of those on Wall Street

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2. Algorithms can scan 1000s of symbols for patterns

A quantitative trading system can scan 1000s of symbols in minutes looking for patterns or setups. The “ sheer magnitude of this endeavor makes it impossible No human on this planet for a human without a computer. could even attempt a feat The QiT algorithms scan the (over) 30,000 US equity like that. market symbols every night for the candidates that fit Street Elite our rule set. This takes the computer no more than 30 minutes.

No human on this planet could even attempt a feat like that.

3. A Quantitative system can be tested and validated

When you create a trading system (or algorithm) for your trading rules, the first item on the agenda is backtesting to see if your ideas are indeed profitable. If they have not been profitable over time why would you think they would be profitable in the future? Testing an algorithm over historical data is an essential part of the strategy development process. Estimating the performance of the algorithm allows the trader to refine the strategy and modify parameters before trying it with live data. Backtesting is a complicated task requiring survivorship bias free data and special software to run the algorithms.

QiT uses Amibroker to run its algorithms and our data provider is Norgate Premium Data.

Algorithms do not merely rely on conventional trading wisdom, they validate – or invalidate - conventional wisdom. What does, "let your profits run and cut your

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losses" really mean? How much profit? At what point do you cut your losses? You cut them too short and you'll never make it as a trader.

No bias or subjective analysis is ever introduced in the validity of the system.

Therefore, trading confidence rests on quantifiable and tested values.

Become the algorithm

If you trade with an algorithm you have to give yourself up to it. You have to trade as if you were the algorithm. This doesn’t mean you have to give up any particular indicator you like but if you want to trade with an algorithm and use a particular indicator, you develop your algorithm around it. If you have a particular strategy you always trade and develop your algorithm around it. Then test and test and retest it to see if it was successful during bullish years, bearish years, low volatility, high volatility, and market crashes (like we had in 2008). Test it in every kind of trading environment you can think of and see how well it works.

Once you’ve put in the hours and the dollars to develop your algorithm you enter the world of a Quant and you become the algorithm when you trade. All the planning has been done and is behind you, so all you need to do is follow the signals given to you by your planning and the work you’ve put into its development.

But you need to trade it as if you were the algorithm, not as if you were a trader. Does the algorithm take heed of the news? Does the algorithm worry about economic events that take place during the day? Does the algorithm watch price action during the day?

NO.

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Take off the trader’s hat and put on the Quant hat. The more often you do this the better that hat will fit. The easier it will become to not heed news, not watch your trade intraday and just give yourself to the algorithm.

This is the way retail traders make boatloads of money.

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5 Steps to Start Algorithmic Trading

Algorithmic trading is typically perceived as a complex area for beginners. It can cover a wide range of markets (options, futures, equities), and certain features require a significant degree of mathematical and statistical maturity. Thus, it can be extremely disconcerting for even the experienced trader. The reality though, once you find an Algo Trading site in which you trust, the overall concepts are straightforward to grasp. You have no need to know how to:

• code the software that resides under the algorithm • use a data provider that does not have survivorship bias • produce the nightly signals • optimize the algorithms without over optimizing

So if you want to start Algo trading where do you start?

1. The most important piece of the puzzle is knowing what kind of trader you are. In other words what is your style? Here at QiT we trade US equities with EOD data. We use no leverage so we keep our risk to a minimum. If you don’t want to use leverage and trade US Equities, then QiT is a good fit.

2. It is vital you have a broker who:

a. is as concerned about commissions as you are. Many are not. One of the QiT portfolios had 40 trades in one month. If your broker charges you $10 per trade, there is no trading system that could make up for an $800.00 drawdown, unless you were trading with very large capital. Many at QiT

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use IB because their commission structure is one of the best in the business.

b. will have shares available to borrow when you try to short. It doesn’t matter how good a system is if you can’t trade it. When shorting a stock, your broker lends the shares to you. Those shares come from the brokerage's own inventory, from another one of the firm's customers, or from another brokerage firm. If your broker doesn’t have access to inventory then you cannot short it. Occasionally a short cannot be traded because IB does not have the inventory but it has happened infrequently enough to not be a problem. It should not be a problem for you either.

c. has a good reputation in the industry. Could professional traders use your broker? How secure is their on-line trading platform? How easy is the trading platform to learn, use and customize? Does it have a mobile app? What kind of costs does it have for rules violations? How easy is it find your account details? What is their customer service like?

3. Many would think one of the most important aspects of Algo Trading is computer knowledge and a really good computer. If you trade with an Algo service, like QiT, all the computer work has been done for you. All the algorithms development, all the optimizing, all the hard work. All you need to do is log in to your computer each night and put on the trades.

4. Find the Algorithmic Trading Service that will fit you. This means that the service must not only fit your style (Rule #1) but have the performance records that make it worth your time.

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Here at QiT we offer the best EOD Swing Trading Algo service in the market. We can say that because at QiT you will get a detailed guide through every step:

* When to buy or short

* At what price to buy or short

* Number of shares based on your account, price of stock percent allocated to position

* At what price to exit

* A portfolio tracker for every portfolio you trade

* A chat room where you can talk to other members

* Access to the developer at anytime

* Performance records not seen on many Algo trading sites.

5. And last but certainly not least, commit to the process, become the algorithm and make this rule a given.

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