- The neuro-behavioral
science trading edge
- Before automating your
day trading systems
- Vijay L Bhambwani
Jan 12, 2016
- Day traders are a unique kind of people
- they go into a trading session with a near open (blank slate) state of
mind, quickly form directional opinions in the first few minutes of
trade by watching the screen, and jump into the trading pit. They put in
multitudes of trades and hope to make more than they lose during the
session, and go home after being "flat out" (zero exposure) on their
prop trading book. Many trading styles exist and all have their pros and
cons. Some are discretionary and some are mechanical. Some are gray
boxes (mixture of both) and then again, some are statistical programs,
some pure chartical, some are sheer screen reading regimens and so on
and so forth. The first question is - should you automate ? My answer
would be - yes ! My suggestions -
- a) Automating a trading style takes the
emotional aspect out of trading. The trader has a lesser probability of
"chickening out" of a trade or "kill" the trade prematurely.
- b) Mechanical systems once put in place,
save tremendous time, effort and emotional energy on a daily basis as
the trader is almost totally relieved from the onerous task of selecting
the counter to trade
- c) The entry and exit are
pre-determined, the contingencies of premature exits are well defined,
should something go wrong (it invariably happens)
- d) Traders often react to the same
scenario in different manners, depending on the prevalent circumstances.
If you are broke, you tend to pass off many high probability trades. If
you are flush with funds, you tend to overtrade. With a mechanical
system, risk management and trade size is automated.
- e) Mechanical systems are a tremendous
psychological help as they "flag" the markets at turning points more
reliably than discretionary style manual trading.
- Having decided to go for a mechanical
trading system (I assume you will program a system yourself, like I do),
do keep in mind a few things -
- a) KISS - keep it simple stupid. Veteran
traders know this. Rookies think complicated is sexy, its profound and
"with it." But most of those rookies arent even traders. They are
everything but traders !
- b) Your system must be all encompassing
- entries, exits, stoplosses, trade sizing, financial management,
capital control and layoffs (periodic forced trading holidays after big
gains or drawdowns). Only non participating experts feel you can get
away with leaving a few chinks uncovered in your armour. As a doer of
deeds, you know the chain is as strong as the weakest link in the chain.
- c) The system should perform reasonably
well in bull & bear markets with an acceptable variation in performance
- d) The system should not let a trader
remain in an adverse position at market turning points, evolution from
trending to ranging markets or vice versa
- e) The system should catch atleast 35%
of the trending price move (if not higher) once the trade is initiated.
A lower percentage would result in a skewed risk / reward ratio
- f) The return on capital vis-a-vis
traded turnover for the day should ideally be 0.2% or higher. For every
crore Rupees in daily turnover, your profit should be Rs 20,000 or
- g) You should ideally be "flat out"
(zero open trades) at the end of the session. If a residual trade does
remain open, it should be initiated into the direction of the prevalent
trend and the trend in a higher time frame of atleast 1
magnitude (hourly / daily)
- h) Professional traders dont take
reckless risks, that is for rookies. Your system should be based on
sound trading maxims and zero leeway should be allowed to get into a
trade because you "havent traded for x period of time"
- i) You programmed your system, your
values, passion to trade and commitment to the trading game is not
negotiable. Neither should your system be. Dont bypass your system once
- j) Avoid the pitfall of over simplifying
your systems using linear extrapolation - 7 out of 10 years, markets are
bullish in December. Let a statistician have fun with such analysis. You cannot bet your risk capital unless all
technical parameters and weight of recent evidence (not
historical alone) support a buy or sell decision. When you climb the
stairs of a high rise building, the climb is easier initially, but
laboured as you get higher. Markets labor similarly after a sustained
- k) Volatility tends to move in clusters.
Seldom does a price spike up / down and return to equilibrium like the
spike never occurred. Prices have a "memory" too. Your system should be
able to factor in these clusters
- l) Dont let your system go "live" unless
it's tried and tested over 1 bull phase and bear. It must complete one
full cycle before winning your trust. Your trading capital is not your
own, it belongs to your entire family, it is not worth risking your
- Have a profitable day !
- Vijay L Bhambwani