Tool Box cont.. Demo Accounts & Automatic Trading

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Practice (Demo) Accounts

Before setting out to trade and after you've studied this course (amongst other resources) it's not a good idea to go gung-ho into trading.  Set up a Demo Account.  Most broker firms have them, as do some software packages like Tradestation.  Setting up the practice account will allow you to learn from your trading mistakes to become  better trader.  

Whatever strategy you pick, you will need to learn it well. You need to understand it clearly, inside and out. You need to know it like the back of your hand. This is vitally important because when you’re in the middle of a trade, there are no room for errors and there is no time to ask questions. You have to know it solidly before you venture out. If you don’t have a track record on a practice trading account, there is no reason to believe that you will make money with real trading.

Automated Trading

Trading systems are simply sets of rules that traders use to determine their entries and exits from a position. Developing your trading system and automating it can lead to consistent gains, but it's not all sweet.  Money can also be lost if your system is out of whack with the trading environment.  Automated trading systems are created by converting your trading system's rules into code that a software package can understand. Your computer then runs those rules through your trading software, which looks for trades that adhere to your rules. Finally, the trades are automatically placed with your broker. Your broker may also have a facility to run automatic trades.  Flow of events:

Your Trading Rules that meet your Strategy -> Software Package -> Broker

There are many trading programs that support automated trading systems. Some will automatically generate and place trades with your broker (Trade Station, Meta Trader, Cool Trade, Interactive Brokers). Others will automatically find trades that fit your criteria, but require that you place the orders with your broker manually (AmiBroker, Tradecision). Moreover, fully automatic trading programs often require that you use specific brokerages that support such features. Brokers may also have these facilities.

We're often told to take the emotion out of trading and act on the signals that our set up demands.  Automatic trading does this with bells on.  Once the system has been developed, tweaked and tested it take no work to trade (until market conditions change), leaving you free to develop other trading strategies.  However, if the coding isn't quite right it can lead to large losses and quite honestly, automated systems are hard to code.
The following sites are software packages that allow some kind of automated trading:
Designing your Automated System

Generally these are designed in 3 main steps:
  • Create you system rules. There should be four core rules to a system - 
    • When to Buy
    • When to sell
    • Create a stop/loss
    • Identify a target.  
Eg, Buy when SMA (10) crosses above SMA (30); Sell on the reverse; Stop on SMA (30); Target 10 units. {This is just an example.  Create your own rules in line with your strategy}
  • Identify the Indicator or study associated with above each rule. The software will have a list of technical indicators.  In our example we would use SMA (10) and SMA (30) associated with our by and sell  and stop/loss rules.
  • Add actions to our rule. Each action will have the following general formula:
IF Condition [WHILE Condition] THEN Action

So in our example our actions would be:
IF MA(10) Crosses Above MA(30) THEN Buy
IF MA(10) Crosses Below MA(30) THEN Sell
IF our trade has 10 units of profit THEN Sell
IF our trade crosses MA (30) THEN Sell

Coding your System

Now that we have a design document in hand, they have to be coded so that a computer can understand them. I'm no expert on this, so I'll revert you to the following Investopedia page:

Things to Remember

It's worthwhile checking out some of the software packages I've highlighted above to get a better understanding of what coding actually does in all the different packages.  If you're serious about coding it's also probably a good idea to join coding forums and visit dedicated coding sites to find out how others are going about it.  I'll link some sites below.
  • Always back test until your system performs well with past data
  • Then paper trade with a demo account to make sure your system performs well with current data.
  • Only trade in a market that your system is designed for - Trending, Ranging, Reversal etc...
  • Make changes one at a time so that you can pinpoint which aspects are improving your returns and which are hurting them.
  • Keep it simple. Extremely complex trading systems are often fitted to work well with past data, but are incapable of adapting to new market conditions.
  • Know the strategy behind your trading system. 
  • Don't over-optimize. Optimizing too much can lead to what is known as curve-fitting, which can reduce your trading system's effectiveness and ability to adapt.
Further Reading...

The following sites will be required for further automated trading reading:


=======

Previous...


Practice (Demo) Accounts

Before setting out to trade and after you've studied this course (amongst other resources) it's not a good idea to go gung-ho into trading.  Set up a Demo Account.  Most broker firms have them, as do some software packages like Tradestation.  Setting up the practice account will allow you to learn from your trading mistakes to become  better trader.  

Whatever strategy you pick, you will need to learn it well. You need to understand it clearly, inside and out. You need to know it like the back of your hand. This is vitally important because when you’re in the middle of a trade, there are no room for errors and there is no time to ask questions. You have to know it solidly before you venture out. If you don’t have a track record on a practice trading account, there is no reason to believe that you will make money with real trading.

Automated Trading

Trading systems are simply sets of rules that traders use to determine their entries and exits from a position. Developing your trading system and automating it can lead to consistent gains, but it's not all sweet.  Money can also be lost if your system is out of whack with the trading environment.  Automated trading systems are created by converting your trading system's rules into code that a software package can understand. Your computer then runs those rules through your trading software, which looks for trades that adhere to your rules. Finally, the trades are automatically placed with your broker. Your broker may also have a facility to run automatic trades.  Flow of events:

Your Trading Rules that meet your Strategy -> Software Package -> Broker

There are many trading programs that support automated trading systems. Some will automatically generate and place trades with your broker (Trade Station, Meta Trader, Cool Trade, Interactive Brokers). Others will automatically find trades that fit your criteria, but require that you place the orders with your broker manually (AmiBroker, Tradecision). Moreover, fully automatic trading programs often require that you use specific brokerages that support such features. Brokers may also have these facilities.

We're often told to take the emotion out of trading and act on the signals that our set up demands.  Automatic trading does this with bells on.  Once the system has been developed, tweaked and tested it take no work to trade (until market conditions change), leaving you free to develop other trading strategies.  However, if the coding isn't quite right it can lead to large losses and quite honestly, automated systems are hard to code.
The following sites are software packages that allow some kind of automated trading:
Designing your Automated System

Generally these are designed in 3 main steps:
  • Create you system rules. There should be four core rules to a system - 
    • When to Buy
    • When to sell
    • Create a stop/loss
    • Identify a target.  
Eg, Buy when SMA (10) crosses above SMA (30); Sell on the reverse; Stop on SMA (30); Target 10 units. {This is just an example.  Create your own rules in line with your strategy}
  • Identify the Indicator or study associated with above each rule. The software will have a list of technical indicators.  In our example we would use SMA (10) and SMA (30) associated with our by and sell  and stop/loss rules.
  • Add actions to our rule. Each action will have the following general formula:
IF Condition [WHILE Condition] THEN Action

So in our example our actions would be:
IF MA(10) Crosses Above MA(30) THEN Buy
IF MA(10) Crosses Below MA(30) THEN Sell
IF our trade has 10 units of profit THEN Sell
IF our trade crosses MA (30) THEN Sell

Coding your System

Now that we have a design document in hand, they have to be coded so that a computer can understand them. I'm no expert on this, so I'll revert you to the following Investopedia page:

Things to Remember

It's worthwhile checking out some of the software packages I've highlighted above to get a better understanding of what coding actually does in all the different packages.  If you're serious about coding it's also probably a good idea to join coding forums and visit dedicated coding sites to find out how others are going about it.  I'll link some sites below.
  • Always back test until your system performs well with past data
  • Then paper trade with a demo account to make sure your system performs well with current data.
  • Only trade in a market that your system is designed for - Trending, Ranging, Reversal etc...
  • Make changes one at a time so that you can pinpoint which aspects are improving your returns and which are hurting them.
  • Keep it simple. Extremely complex trading systems are often fitted to work well with past data, but are incapable of adapting to new market conditions.
  • Know the strategy behind your trading system. 
  • Don't over-optimize. Optimizing too much can lead to what is known as curve-fitting, which can reduce your trading system's effectiveness and ability to adapt.
Further Reading...

The following sites will be required for further automated trading reading:


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