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DIY System Trading

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Can a person, having full time occupation, do the system trading by himself? The short answer is “Yes, but too risky”.

Why? By far the hardest, the most time consuming work that requires certain qualifications as well is system development itself. And this is not an issue. Companies like Covestor, Collective2 or Zulutrade have done a good job to offer sufficient amount of back-tested and well-maintained trading systems to choose from. To acquire some basic working knowledge on trading system analysis shouldn’t be a major problem either.

The key issue with DIY system trading is still far from 100% reliable routing of the trade from the system vendor to live account. The hard fact is that automated system trading from to time results in mismatched positions in live account. Mismatched positions, if not corrected in timely manner, is one of the costliest mistakes one can make in system trading.

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Written by A.S.

January 5, 2012 at 5:59 pm

Which System Development Platform

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It´s been more than a decade since it´s possible to place a trade online. And nearly a decade since it´s possible to autotrade virtually any trading system through a publicly available software. Technically, today anybody with limited effort can design a trading system, backtest it, turn automated trading on and let the computer to do the trades in live account.

What choice of trading system development platforms do we have? The following list is far from exhaustive, but some of the most popular options are:

Tradestation. Easy to use. The programming language is the proprietary Easy Language. You can describe the trading system in a language which is quite close to describing it in English language. All major stock, futures/options exchanges and forex supported. However, you can use it only with one broker – Tradestation Securities. The software is free to use for brokerage customers, but there is a subscription-only service for $250/month plus data fees.

Metatrader. Widely adopted by forex brokers and traders. There is a proprietary programming language, but it is based on C (Metatrader4) and C# (Metatrader5). The manual rather insufficiently covers even the basic operations and some programming background is helpful. Available to end-users free of charge.

DIY in a general-purpose programming like C, C# or Java. This is the choice of big operators like larger funds.

Other options include: MatLab, X_Trader (Trading Technologies), Wealth-Lab, TraderStudio or Ninja Trader, eSignal, FXtrek, MCFX, . These software platforms, except for X_Trader and Ninja Trader, are not built for automated trading.

Which one is the best? For an individual without programming background or a small organization, I guess that Tradestation would do the job. It’s easy to use. If the strategy is simple enough, the chances are you’ll be able to program it in the shortest possible time with Tradestation. However, no portfolio testing is not available in Tradestation. If you’re looking for a super-simple solution (with limited functionality, though), then nothing gets more simple than Ninja Trader.

Technically, general-purpose programming language provides the most flexibility and versatility. But it is not suitable to everyone. Imagine you’ve a business proposition (a trading strategy), but you ‘ve to express it in fluent Chinese (a language you don’t know). So to make the proposition, you’ve got to learn Chinese first or hire an interpreter. The same is about programming languages – it takes long time to learn and master it, it’s not worth, if you only want to test a few strategies.

Written by A.S.

January 9, 2011 at 7:21 pm

What happened to our real-time experiment?

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On June 1, 2010 we started a real-time experiment to illustrate how the system trading works and the profit potential of this type of investing.

We followed through for about 7 weeks before we diverted the resources to an income-producing work at hand. During those 7 weeks the results were mixed.

Overall, pure currency systems (Alpari PAMM, Tradency, Zulutrade) performed better than stock (Covestor) or commodity systems (Collective2). Since then, Covestor has redesigned its web site and the service offer looks more compelling than ever. The performance of Covestor models (i.e. strategies or trading systems) have recovered noticeably from last June. As at the time of writing, top-performing Covestor models are back on track with up to 55% returns during the last 3-month period (apparently, in line with the general market upward move).

Tradency has redesigned web site and now have the product offer directly from their web site rather than kept it obscured somewhere in brokers´ web sites. Collective2 and Zulutrade have kept their service offer basically unchanged, save for some non-essential features (such as additional languages and too-simple-to-be-useful analytic tools).

The basic premise of system trading is that, theoretically, a good trading system should perform well irrespectively of general market direction. In practice, most trading systems depend on certain market conditions, their performance is limited in time and it is critical to recognize and scale out systems whose ¨production stage¨ is over.

One of the conclusions to draw from the experiment is clear: constant monitoring and adjustment of the system portfolio is a must. Hardly any of the trading systems, originally included in the portfolio, pass the test 5-6 months later.

Namely,

On Collective2, out of 11 systems, 9 are down, 2 are up. The average decline is about 10%.

On Zulutrade, out of 15 systems, 4 systems are not identifiable, 6 are down and 5 are up. Average up is about 8% (not counting the unidentifiable four).

On Tradency, out of 6 systems, 2 are not identifiable, 3 are down and 1 is marginally up.

So, out of 32 systems, only 8 or 25% are good half-a-year later. The other 24 systems would have been removed from the system mix in the due course of the ongoing selection process.

System trading portfolio down 1.1% in June

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Value of the sample portfolio, run as a part of the system trading gig, declines by 1.1% in June.

Value of three portfolios (with trading systems sourced from Alpari PAMM, Tradency and Zulutrade accordingly) is up while value of two portfolios (Collective2 and Covestor) are down.

The best performer with 6.3% gain is Alpari PAMM portfolio. The worst performers are Covestor (6.4% loss) and Collective2 (3.6% loss).Value of S&P index during the same period has declined by 2.45%

Written by A.S.

July 4, 2010 at 5:54 pm

Sources of Trading Systems

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The ecosystem of automated trading develops fast. Capital allocated to system trading through industry leaders, such as Covestor or Collective2, reportedly grows by 50% annually.

There is still a plenty of room for growth as the investors ¨chop off the old block¨, i.e. disallocate the funds from chronically non-performing and increasingly risky traditional investments in stocks and bonds.

I here list 8 sources for you to choose as a provider of trade signals for your system trading account. Those sources are the ones likely to be used by both emerging system developers as well as investors.

Collective2
Collective2.com or C2 is an internet-based company. C2 collects performance data of various trading systems, independently verifies such performance data and makes the systems available to subscribers to trade in real-life trading accounts. At the time of writing there are about 7’000 trading systems registered on C2.
The way it works is — you go to C2 web site, register as a user, find a trading system which, as an example, shows 88% annual return, make a few clicks to set the system up to send the trades to your brokerage account and, if the systems lives up to the expectations, you have just arranged for an investment with 88% annual return.
C2 promotes itself as think of Collective2 as „do-it-yourself” hedge fund.
C2 works only with hypothetical data, although it checks all the signals in real-time and provides both estimates (slippage, realism factor) and tools for investors to evaluate what performance in live accounts would look like.

Covestor (and cv.im)
Covestor is one of the best-managed and innovative trading system aggregators.
Covestor displays performance data from live trading accounts and is limited to stocks only.

Zulutrade
Zulutrade deals with hypothetical forex signals only.
Zulutrade is probably the fastest growing of all system aggregators. It takes only a couple of minutes to sign up as a system vendor. Zulutrade is equally easy for investors as account opening procedure is straigthforward and easy with any of the selected brokers.
There are no fixed fees for neither system vendors, no investors. Systems can be added and removed from trading in live accounts with just a few clicks and at no cost. Fee for the services is pay-as-you go in form or bid-ask spread markup. Such spread mark-up (about 2 pips round-turn for the most liquid currency pairs) is then shared between Zulutrade and the system vendor.

Tradency
Tradency service is available through selected forex brokers, including several major retail brokers, such as FXCM.
Tradency system performance data is hypothetical rather than based on live account trade logs.

Fxbees
If you´re looking for system aggregator service for forex signals based on live accounts, then Fxbees.com is for you.

Myfxbook
Myfxbook positions itself more than a community of forex traders rather than system aggregator service provider.
Forex traders allow data from live forex accounts to be explained on Myfxbook website. Potential investors can review the data and contact the trader directly for signal delivery terms and conditions.

AlphaClone
AlphaClone compiles data about major equity positions from 200 major hedge funds and institutional investors from their public filings.
There is a time-delay involved as such public filings with SEC are made quarterly. If you feel comfortable to ¨clone¨ positions of, say Warren Buffet, this is the service to use.

Alpari PAMM
Alpari is a Russian-owned forex broker with operations in several countries, including UK and UAE.
Alpari customers may enable their live account performance to be available for public disclosure. If done so, the live account performance is ranked and any investor may open PAMM account to copy the trades of the most profitable traders.
The fees related to PAMM account are structured as performance fee. Under this arrangement, investor pays a share of profits as a performance fee and such fee is shared between the broker and the trader.

Source: free e-book Be Your Own Hedge Fund Manager.

Looking for more trading system sources

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I´m looking for more trading system sources, apart from collective2.com, covestor.com and zulutrade.com.

So far I´ve spotted and marked for further research the following ones:

1. FXCM and Alpari
Both are forex brokers. Brokers, generally, are well-placed to identify the best traders and trading systems. They keep customer funds and have all the trade information recorded on their servers.  At at the time of writing, FXCM  has 2077 systems listed, Alpari – 499.

2. AlphaClone allows investing in ¨the stock ideas of top managers at the time their stock ideas become public¨. There is time delay involved, of course, as funds disclose top holdings quarterly. Basically, information from 200+ funds ¨cloned¨ into 15´000+ investment portfolios.

Covestor’s Most Popular Down 21% in May

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The most popular model manager on Covestor is down almost 21% month to date.


However, the model is up annualized 162% since inception on 10th April, 2010. 20+ percent drawdown is historic maximum drawdown for the system.

Drawdown of this magnitude, after months of good performance, is nothing extraordinary in the system trading world. Happens all the time.

What do you do, if you have a system like this in your portfolio? Quite simple – you pull it from your portofio. You may re-evaluate it later and probably put it back in the porftfolio, but at the moment it’s no-brainer – ditch the system from your portfolio just because it moves out of its historic performance parameters.

Have you lost money? Not at all, if you traded the system correctly. What does it mean to “play it correctly”? You watched the system for about three months in early Y2009, then gauged it’s risk/return profile and put it in your porftfolio. You still made about 100% annualised return on your money while the system was in your portfolio from July – August 2009 till May 2010.

Written by A.S.

May 23, 2010 at 11:17 pm