1. Automated Trading Methodology
– The Evolution of Trading
Vito Henjoto
Technical Analyst, GFT
(c) 2013 Global Futures and Forex, Ltd. All rights reserved.
3. Agenda
• Digital Era and Advent of Automated Trading
• Manual Trading (why most traders fail)
– Advantages and Disadvantages
• Automated Trading
– Advantages and Disadvantages
• Common types of Automated Trading Strategies
• Back testing
These examples are being used for educational purposes only. Past performance is not necessarily indicative of future results. The views of the author are not necessarily those of
GFT, its owners, officers, agents or employees. This presentation does not constitute a recommendation to follow a particular trading strategy. All trades should be considered
carefully with your personal trading strategy, including risk tolerance. In addition, any projections or views of the market provided by the author may not prove to be accurate.
(c) 2013 Global Futures and Forex, Ltd. All rights reserved.
4. Advent of Automated Trading
• Automated Trading (HFT and ALGO) has been around for 20 years
• Revamp the whole trading industry
• Greater Liquidity*
• Contrary to what is reported in the media, may in fact Lower Volatility*
• Drive down Trading Cost*
– Narrow Bid and Ask Spread difference
• Better price discovery
• During ‘FDAX Flash Crash’ Automated trading prevents abrupt price movements.**
• Improving Market Quality during periods of market uncertainty
*Credit Suisse, 2012: “Who lets the Bots Out? Market Quality in a High Frequency World”
**Backes, October 2011: “High-Frequency Trading and the New-Market Makers”
These examples are being used for educational purposes only. Past performance is not necessarily indicative of future results. The views of the author are not necessarily those of
GFT, its owners, officers, agents or employees. This presentation does not constitute a recommendation to follow a particular trading strategy. All trades should be considered
carefully with your personal trading strategy, including risk tolerance. In addition, any projections or views of the market provided by the author may not prove to be accurate.
(c) 2013 Global Futures and Forex, Ltd. All rights reserved.
5. Manual Trading
• Trading method that requires
Human involvement
• Manual Market Analysis is
involved
• Results vary according to Skill
and Experience
• Flexibility is an option
These examples are being used for educational purposes only. Past performance is not necessarily indicative of future results. The views of the author are not necessarily those of
GFT, its owners, officers, agents or employees. This presentation does not constitute a recommendation to follow a particular trading strategy. All trades should be considered
carefully with your personal trading strategy, including risk tolerance. In addition, any projections or views of the market provided by the author may not prove to be accurate.
(c) 2013 Global Futures and Forex, Ltd. All rights reserved.
6. Manual Trading
Pros
• Fundamental assessment of the
market
• Ability to adapt to market changes
• Control (risk, money and what to
trade)
• Flexibility (can open and close
positions anytime)
• If successful, Satisfaction
These examples are being used for educational purposes only. Past performance is not necessarily indicative of future results. The views of the author are not necessarily those of
GFT, its owners, officers, agents or employees. This presentation does not constitute a recommendation to follow a particular trading strategy. All trades should be considered
carefully with your personal trading strategy, including risk tolerance. In addition, any projections or views of the market provided by the author may not prove to be accurate.
(c) 2013 Global Futures and Forex, Ltd. All rights reserved.
7. Manual Trading
Cons
• Higher Learning Curve
• Time consuming
– Research and Analysis
• Constantly monitor the market
– At times leaving the computer on 24 hours
– Missed Opportunity
• Requires Discipline
– Inconsistency
• Decision making is not for everyone
– Emotion
These examples are being used for educational purposes only. Past performance is not necessarily indicative of future results. The views of the author are not necessarily those of
GFT, its owners, officers, agents or employees. This presentation does not constitute a recommendation to follow a particular trading strategy. All trades should be considered
carefully with your personal trading strategy, including risk tolerance. In addition, any projections or views of the market provided by the author may not prove to be accurate.
(c) 2013 Global Futures and Forex, Ltd. All rights reserved.
8. Automated Trading
• Trading method that requires little to no human
intervention.
• A program commonly referred to as “robot”
trades.
• Directives are coded either through a personal
strategy or quantitative analysis.
• Pre-coded systems are available to general
public
These examples are being used for educational purposes only. Past performance is not necessarily indicative of future results. The views of the author are not necessarily those of
GFT, its owners, officers, agents or employees. This presentation does not constitute a recommendation to follow a particular trading strategy. All trades should be considered
carefully with your personal trading strategy, including risk tolerance. In addition, any projections or views of the market provided by the author may not prove to be accurate.
(c) 2013 Global Futures and Forex, Ltd. All rights reserved.
9. Automated Trading
• Types of Automated Trading
– Algorithm trading
• Commonly used by Retail Traders and Investors
• Has been around since the 1980s
– High Frequency Trading
• Accounts for 1/3 of Volume in the Global Financial
Market
• Hedge fund, Institutional traders
• High Cost of maintenance
• Retail Traders do not have access to this
These examples are being used for educational purposes only. Past performance is not necessarily indicative of future results. The views of the author are not necessarily those of
GFT, its owners, officers, agents or employees. This presentation does not constitute a recommendation to follow a particular trading strategy. All trades should be considered
carefully with your personal trading strategy, including risk tolerance. In addition, any projections or views of the market provided by the author may not prove to be accurate.
(c) 2013 Global Futures and Forex, Ltd. All rights reserved.
10. Automated Trading
Pros
• Minimal knowledge is required
• Improves trade consistency
• Removes emotion out of trading
• Less time consuming than manual
trading
• VPS (virtual private server) are available
– Removes the need to run computer 24hours
– Prevents power outage issue and
disconnection to trading platform
– Can be remotely monitored
These examples are being used for educational purposes only. Past performance is not necessarily indicative of future results. The views of the author are not necessarily those of
GFT, its owners, officers, agents or employees. This presentation does not constitute a recommendation to follow a particular trading strategy. All trades should be considered
carefully with your personal trading strategy, including risk tolerance. In addition, any projections or views of the market provided by the author may not prove to be accurate
(c) 2013 Global Futures and Forex, Ltd. All rights reserved.
11. Automated Trading
Cons
• Dependent on MarkLack of control
• Does not take into account
Fundamentals
• Unable to assess current market
condition
• Due to systematic nature, trades cannot
be disrupted
• A single strategy will not work all the time
– et condition
• Trending
• Range Bound
These examples are being used for educational purposes only. Past performance is not necessarily indicative of future results. The views of the author are not necessarily those of
GFT, its owners, officers, agents or employees. This presentation does not constitute a recommendation to follow a particular trading strategy. All trades should be considered
carefully with your personal trading strategy, including risk tolerance. In addition, any projections or views of the market provided by the author may not prove to be accurate
(c) 2013 Global Futures and Forex, Ltd. All rights reserved.
12. In Practice – Commonly Used
Strategies
Most automated trading used by retail traders can
be classified under the following type of strategies:
• Trend Following
• Pairs Trading
• Scalping
• Means Reversion
These examples are being used for educational purposes only. Past performance is not necessarily indicative of future results. The views of the author are not necessarily those of
GFT, its owners, officers, agents or employees. This presentation does not constitute a recommendation to follow a particular trading strategy. All trades should be considered
carefully with your personal trading strategy, including risk tolerance. In addition, any projections or views of the market provided by the author may not prove to be accurate
(c) 2013 Global Futures and Forex, Ltd. All rights reserved.
13. Trend Following
• A strategy that takes advantage the Up and Downs of Market
Movement.
• Such Strategy will try to exploit price movements across all time
frame.
• Remember that trend is subjective!
– Daily time frame could be in an uptrend
– 1 hour timeframe could be in a downtrend, during periods of consolidation
• Moving Averages and Chart Pattern breakouts are the most common
combination in such strategy.
• Trend Following Strategy do not have a specific target level, instead
it will track the trend until the opposite signal is triggered.
– Example:
• MA 50 crosses above MA100, this is perceived to be a buy signal.
• Position will remain in place until MA 50 crosses below MA 100.
• This will close the original Buy position and Open a Sell order
These examples are being used for educational purposes only. Past performance is not necessarily indicative of future results. The views of the author are not necessarily those of
GFT, its owners, officers, agents or employees. This presentation does not constitute a recommendation to follow a particular trading strategy. All trades should be considered
carefully with your personal trading strategy, including risk tolerance. In addition, any projections or views of the market provided by the author may not prove to be accurate.
(c) 2013 Global Futures and Forex, Ltd. All rights reserved.
14. Trend Following
Source: Dealbook 360
These examples are being used for educational purposes only. Past performance is not necessarily indicative of future results. The views of the author are not necessarily those of
GFT, its owners, officers, agents or employees. This presentation does not constitute a recommendation to follow a particular trading strategy. All trades should be considered
carefully with your personal trading strategy, including risk tolerance. In addition, any projections or views of the market provided by the author may not prove to be accurate.
(c) 2013 Global Futures and Forex, Ltd. All rights reserved.
15. Pairs Trading
• Every Financial Instrument will have a correlation to another
instrument.
– Positively correlated stocks in the same industry
• Coca Cola and Pepsi
• Tech Stocks
– Negatively correlated currencies such as EUR/USD and USD/CHF
• Especially in Forex Trading, where it is traded in Pair.
• Categorized as a statistical arbitrage and considered to be a type of
convergence trading.
• This Strategy does not care if the market is in a trend or range
bound.
• The Strategy exploits imperfection in Market correlations.
• A good strategy that aims to minimize risk
• The assumption behind this strategy is that market tends to correct
itself over time.
These examples are being used for educational purposes only. Past performance is not necessarily indicative of future results. The views of the author are not necessarily those of
GFT, its owners, officers, agents or employees. This presentation does not constitute a recommendation to follow a particular trading strategy. All trades should be considered
carefully with your personal trading strategy, including risk tolerance. In addition, any projections or views of the market provided by the author may not prove to be accurate.
(c) 2013 Global Futures and Forex, Ltd. All rights reserved.
16. Pairs Trading (example)
Source: Dealbook 360
These examples are being used for educational purposes only. Past performance is not necessarily indicative of future results. The views of the author are not necessarily those of
GFT, its owners, officers, agents or employees. This presentation does not constitute a recommendation to follow a particular trading strategy. All trades should be considered
carefully with your personal trading strategy, including risk tolerance. In addition, any projections or views of the market provided by the author may not prove to be accurate.
(c) 2013 Global Futures and Forex, Ltd. All rights reserved.
17. Pairs Trading (example)
• EUR/USD and USD/CHF are inversely correlated, i.e. they are mirror
opposite of each other 97% of the times.
• There are periods where both EUR/USD and USD/CHF move in the
same direction.
• In the example above EUR/USD remains the same, but USD/CHF
gains
• Buy EUR/USD and SELL USD/CHF in a situation like the above.
• When the market correct itself USD/CHF will resume it’s downward
movement and traders profit from the EUR/USD buy as well as
USD/CHF sell.
• Position is essentially hedged until market correct itself.
• Normality does not exist until the above happens and profits yield.
– Critical to identify when market condition changes
– Humans are unable to be there all the time to monitor these changes
These examples are being used for educational purposes only. Past performance is not necessarily indicative of future results. The views of the author are not necessarily those of
GFT, its owners, officers, agents or employees. This presentation does not constitute a recommendation to follow a particular trading strategy. All trades should be considered
carefully with your personal trading strategy, including risk tolerance. In addition, any projections or views of the market provided by the author may not prove to be accurate.
(c) 2013 Global Futures and Forex, Ltd. All rights reserved.
18. Scalping and Mean Reversion
• Scalping and Mean Reversion are the basis to some of the Automated
trading systems out there
• Scalping is the act of opening a position and quickly closing it again to gain
minimal returns within a short period of time ranging from seconds or
minutes
• Scalping strategy is mostly related to a Mean Reversion strategy.
• Mean Reversion is the notion that once the market exceeds an average
boundary, it will revers to normality.
• Such Strategies requires indicator that have Standard Deviation as its
component.
• Bollinger bands is the most common Indicator used for these types of
strategies.
• Automated Trading are best suited for scalping as they can be programmed
to close out the position with 1 pip. Humans are unable to simultaneously
monitor multiple instruments and manual trading will take too long to close
out the position
These examples are being used for educational purposes only. Past performance is not necessarily indicative of future results. The views of the author are not necessarily those of
GFT, its owners, officers, agents or employees. This presentation does not constitute a recommendation to follow a particular trading strategy. All trades should be considered
carefully with your personal trading strategy, including risk tolerance. In addition, any projections or views of the market provided by the author may not prove to be accurate.
(c) 2013 Global Futures and Forex, Ltd. All rights reserved.
19. Bollinger Band Example
Source: Dealbook 360
These examples are being used for educational purposes only. Past performance is not necessarily indicative of future results. The views of the author are not necessarily those of
GFT, its owners, officers, agents or employees. This presentation does not constitute a recommendation to follow a particular trading strategy. All trades should be considered
carefully with your personal trading strategy, including risk tolerance. In addition, any projections or views of the market provided by the author may not prove to be accurate.
(c) 2013 Global Futures and Forex, Ltd. All rights reserved.
20. Back testing
• Methodology used in Automated Trading Development
• Running a strategy with past data, to judge how the program will
perform
• Back testing is a useful tool to obtain information such as
– What Instruments work best
– What time frame the strategy works best
– Fine Tune the strategy to get the best result
– Hypothetical tests with the amount of capital required
– Potential Losses and Gain attributed to the strategy
– What market condition the strategy works in
• Sample data from Trending or Ranging Market
• Date Selection
– E.g. can the trading strategy survive another GFC?
These examples are being used for educational purposes only. Past performance is not necessarily indicative of future results. The views of the author are not necessarily those of
GFT, its owners, officers, agents or employees. This presentation does not constitute a recommendation to follow a particular trading strategy. All trades should be considered
carefully with your personal trading strategy, including risk tolerance. In addition, any projections or views of the market provided by the author may not prove to be accurate.
(c) 2013 Global Futures and Forex, Ltd. All rights reserved.
21. Back testing
CAUTION!
– Back Testing alone is not reliable, Forward Testing must also be done
with any Strategy before you flick the switch!
– Over-Testing is a mistake!
– Fine tuning a strategy to have a minimal drawdown and maximum profit
normally does not work well in real world market condition.
– Make sure your past data is accurate, Inaccurate past data has a huge
impact on test results.
– If you are happy with the results from Back and Forward testing, leave it
as it is.
These examples are being used for educational purposes only. Past performance is not necessarily indicative of future results. The views of the author are not necessarily those of
GFT, its owners, officers, agents or employees. This presentation does not constitute a recommendation to follow a particular trading strategy. All trades should be considered
carefully with your personal trading strategy, including risk tolerance. In addition, any projections or views of the market provided by the author may not prove to be accurate.
(c) 2013 Global Futures and Forex, Ltd. All rights reserved.
22. SUMMARY
– The current trading environment have changed dramatically
– Used correctly an Automated System can complement Manual
trading
– More and more traders are making the switch to Automated
Trading
• This helps them with issues around
– Discipline
– Emotion
– Consistency
– Time Management
– Have more than 1 Automated systems to be used in different
market conditions
– Choose a reliable broker, Automated trading requires a constant
connection to the broker’s server
These examples are being used for educational purposes only. Past performance is not necessarily indicative of future results. The views of the author are not necessarily those of
GFT, its owners, officers, agents or employees. This presentation does not constitute a recommendation to follow a particular trading strategy. All trades should be considered
carefully with your personal trading strategy, including risk tolerance. In addition, any projections or views of the market provided by the author may not prove to be accurate.
(c) 2013 Global Futures and Forex, Ltd. All rights reserved.
