Automated Trading Systems

SharkIndicator’s Shark Week 2023 Webinar Recording – Preparing Your System for Live Trading

Learn about the crucial steps to ensure that your automated system performs within expectations. Thorough testing of an automated trading system before going live is crucial to ensure its reliability, performance, and effectiveness while minimizing potential financial risks. This webinar will cover best practices of system testing to help make your leap into live automated trading as safe as possible.

Automated Trading Systems

The Importance of Automated System Testing and Fallacies of Backtesting

Automated trading provides several unique benefits over traditional, discretionary trading. Some of the most notable are their ability to operate continuously, execute trades quickly and adhere to its trading logic without the emotion that humans have. Human emotion often becomes a hinderance to the ability to succeed at trading due to the fear of loss and greed clouding one’s ability to truly think logically. Of course, there is a lot of depth to human intuition and insights which are not easily emulated in a computer program however I feel that the benefits outweigh those specific limitations.

Developing an automated system has never been easier with tools such as BloodHound and NinjaTrader’s strategy builder. With these you don’t have to strictly rely on a programmer to begin building your system and testing to see how the system performs through historical backtests and live simulations on a paper trading account. The only limitation you have is time and your ability to come up with new ideas to test and build.

While building a system is easy, the biggest hurdle that most new system builders have is understanding the reality and expectations between backtesting (historical, simulated trading) and live trading. There are many best practices in system testing and optimization that are overlooked which will ultimately lead to loss and system failure with unanticipated performance.

Backtesting systems provide a tremendous amount of insight into how a system can perform but is not infallible due to how the backtest processes data and generates execution logs. This can often lead to misrepresentations of performance and expectations in live trading. Even the smallest discrepancies per trade can cause a ripple effect that can turn a system which once looked promising into one that causes significant risk and losses.

It’s imperative that thorough and practical testing is done to give confidence that there are no surprises when you let the program run autonomously. Let Lucrum Trading Systems help with that confidence by employing their years of system testing experience on your next project and schedule a consultation today.

There are many questions to ask yourself; Is your data accurate, do you have enough data, is your slippage factored in appropriately, if using limit orders do you account for possible unfilled orders, is your order management configured to not close or reverse orders which haven’t been filled, are the bar types used showing a hindsight bias, do you have sufficient cushion for intra-trade drawdowns, are the system parameters fit to your testing data, are there ample failsafe in place in the occurrence of specific market conditions, is the system running in a stable environment with redundancy in the event of power/data loss? The list goes on about possible oversights which can dramatically affect a system’s performance moving forward and add additional risk you may not have expected.

The transition between simulated testing and live trading is not one to be treated lightly and a significant amount of time should be invested into building confidence that a system will operate exactly how you intend it to without any surprises. Be sure to have your system analyzed to prevent significant losses before you turn it on.

Automated Trading Systems, Uncategorized

How Innate Human Behavior Limits Effectiveness of Trading System Development

Designing any form of automated trading system is filled with follies of basic human behavior. The ceaseless desire to identify patterns in otherwise abstract data to the lust for wealth all cloud the appropriate diligence in creating a system with a measurable and meaningful competitive advantage.

Systems are developed with the idea of an initial truth, or the basis of how the system can otherwise find a way to generate a favorable reward to the risk applied. Once the idea of the initial truth is established, the process of creating the system is underway. This process plants several inevitable debts which can lead into a sunk cost fallacy which causes one to forcibly look for favorable outcomes in system performance.

  • Your time into creating the system
  • Your money into developing the system
  • Your ego of seeing your system succeed

Once your trading system is created and ready to test, the first two debts are already in play – you want the system to test well or that time and money invested would have otherwise been wasted. If the initial test looks poor, you will innately attempt to find ways to make it look better rather than scrapping it altogether. This approach leads to curve fitting performance as the data is already known and therefore used to your advantage. Tweaking the system to validate yourself will produce a system destined for failure in the uncertainty of future price data.

If the initial performance is good, while a positive sign, can be just as detrimental. The reason for this is that the acceptance of success puts a lesser emphasis on testing the fragility of the system with the fear that the initial results were unreasonable or just lucky.

Any system developed needs to be put through the proper stress test before it should be run in a live setting. In order to do this, you need to know the proper way to test the system in a way that honors the logic and perceived edge, but also shield yourself from walking away if the system is proven invaluable. The latter can be a difficult thing to overcome depending on how much time, money and effort was put into its development.

Lucrum Trading Systems is capable of being the unbiased third party to shield the inherent bias of a system designer and perform the necessary tasks to give confidence to proceed into a live environment. Schedule a consultation today to see how Lucrum can assist you with your trading system.

Your time and effort were put into the development of your trading system and while the initial investment may be great, the potential loss is even greater if it is not properly tested for live trading with the complete uncertainty of the future.

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