Using an automated day trader to generate income

http://fattyfatfat.com/2008/10/automated-day-trader-double-moving-average-crossover-test-1/

by fbbwsa • 18 years ago

101 97 18 years ago

iseff2• 18 years ago

I've been thinking recently about how it would be cool to have a service which allowed you to try different trading algorithms.

For instance, it would have a few algorithms built in, you could choose which you want and with what parameters and then it would monitor how it performs. Also available would be the ability to see how this algorithm would have performed in the past (to see how it worked in bad markets, etc).

It could also have a generic API to allow you to run your own algorithm on your end and simply make calls to BUY and SELL certain things.

(In the future it could even allow _real_ trades, etc. One other cool way to make money off this would be to actually invest in the best performing strategies as they occur over time.)

I'm guessing this is all available to the big firms, but haven't ever heard of anything geared to the hackers who want to try things out.

Does anyone know if this sort of thing exists? Would anyone else think this is neat?

Hates_• 18 years ago

http://www.tradestation.com/platform/overview.shtm

This should do the trick. I've never tried it myself but certainly looks interesting. I know of a few people who use it to try out different systems.

iseff2• 18 years ago

Nice, thanks!

keven• 18 years ago

http://www.portfolio123.com/

omarchowdhury• 18 years ago

http://www.collective2.com

fattyfatfat11• 18 years ago

I've heard good things about http://www.prophet.net/ from other finance professionals.

I've personally never used it. I just download raw pricing data then backtest it myself. You could learn how to do it on even yahoo data if you wanted (for day-over-day trading). Bloomberg is by far the best for intraday price information.

steveplace12• 18 years ago

Historical forex data here: http://ratedata.gaincapital.com/

You can pull close data from Y! Finance.

Tradestation and metatrader work well for backtesting.

mattmaroon13• 18 years ago

If you thought something were profitable in a market, and it was easy enough to implement that any hedge fund could, why would you publish it? They'd just do it too until it was no longer profitable.

jcl3• 18 years ago

On the other hand, if you thought something was highly risky and likely to succeed only for a short time before blowing up, why not publish it, then bet against it? :)

But seriously -- the author's comments seem to indicate that he is not totally comfortable with the technique and that he is aware it could lose, even though it didn't in this case.

mattmaroon13• 18 years ago

I meant long-term profitable, as in +EV compared to buying a SPDR with the money. Even random trading could outperform the market in the short term. But if I thought I had a method that outperformed it for the long term (which hopefully I'll never be dumb enough to) I wouldn't tell anyone.

fattyfatfat11• 18 years ago

you're right. and i ran it until it started losing. I announced the day i quit running the basic moving average crossover algo.

I still dabble with variations of it (made like 250 bucks last friday), but I'm now doing way more research and backtesting before I drop things into the market for real.

erik• 18 years ago

I don't expect wikipedia to be a reliable source of information on this topic, but there is an entry that claims that hedge funds already do this sort of thing: http://en.wikipedia.org/wiki/Program_trading

mattmaroon13• 18 years ago

Oh they're correct, I know some people who write those programs. But they don't publish their algorithms.

pmorici• 18 years ago

There are companies that base their whole business on this sort of thing ie: http://www.jumptrading.com/

lallysingh• 18 years ago

Couldn't you make the same argument about opening up your software? The competition would just give it away until it was no longer profitable.

mattmaroon13• 18 years ago

Most open source software companies make money on service, closed source IDEs, hosted versions, etc. I'm not aware of any company that makes good money selling actual software that could be downloaded or given away by a competitor legally for free. If you're selling .exes, then I wouldn't open source unless you were prepared to switch business models.

FWIW I think open source software is a great thing but in general a horrible way for any sizable corporation to try to make money.

fattyfatfat11• 18 years ago

its quite true that a lot of people do it. Its not ACTUALLY a profitable venture in the sense that the risk-reward profile from a purely monetary standpoint is probably unjustified.

I did it for fun, to learn, to gamble, and hopefully get lucky. God knows I've spent money in worse ways before.

Regarding the theory that other players would jump in the market and cause the opportunity to go away: you're right, but they'd really have to parametrize the same strategy in the same way as you. thousands of people use moving averages already, but all parametrized differently so they produce buy and sell signals at different times.

There's certainly no ideal parametrization that is alawys profitable, as most research shows (and I tend to believe)

mattmaroon13• 18 years ago

I would imagine hedge funds test just about every parametrization you can think of. And since it's a market, wouldn't even similar trading algorithms ruin your chances? Especially considering the tax and fee implications of trading frequently.

steveplace12• 18 years ago

You'd think that would happen, but certain trade strategies (like MA crossovers) are not scalable. Way too much slippage.

There's other quant strategies that HF's use... like taking a bid out of a stock near support to trigger all the stop loss orders and then covering their shorts quickly.

pjharrin5• 18 years ago

I'm actually working on a startup in this space. Nice to see some HN people share a similar interest

drwh0• 18 years ago

there's an entire street dedicated to people developing trading algorithms...WALL. see: quant funds...whats left of them anyway

matt13• 18 years ago

I have no idea what that guy is talking about with double moving averages and what not, but I'd bet that a few simple IF/THEN statements could have produced similar results over the same period of time. Say it hand done well, would you go an invest a few thousand dollars using the IF/THEN algorithm?

On a similar note, say this guy did lose his $3500. Do you think you'd be reading this post on how to automate day trading? Randomness and the survivorship bias play a huge, huge role here.

As far as the website ideas go, I'm pretty sure that some very smart people have demonstrated that using past performance to estimate future performance simply does not work; no amount of tweaking buy/sell algorithms will help you predict where the market is going tomorrow.

pjharrin5• 18 years ago

What is investing if its not a IF/THEN statement?

If price goes up then sell, if price goes down then buy. If the company meets these financial criteria then buy, if not then sell. If the price approaches a resistance level then sell.

Whether your basing the investment decisions on fundamental or technical analysis, either way its an IF/THEN statement at some level.

fattyfatfat11• 18 years ago

touche

Prrometheus2• 18 years ago

>If price goes up then sell, if price goes down then buy

By how much? Within what time period? Are there any other factors that might be pertinent?

The world is not simple.

byrneseyeview• 18 years ago

Is there any decision that can't be restated as an arbitrarily complicated series of if/then statements? If you're patient, you can do addition using just if-thens (IF N1 = 1 and N2 = 5 THEN answer = 6), etc.

fattyfatfat11• 18 years ago

Matt1,

you're exactly right. its just a bunch of if then statements. I played with quite a few variations of a VERY simple, primitive strategy.

I'm the first to admit that that day's P&L was largely the product of luck. In fact, I had quite a bit of remorse after the fact and was thankful that the coin flipped my way that day.

Regarding predictive engines, you're definitely right as well. Most educated financial professionals don't believe tat you can predict future price movement with any degree of certainty, but there IS a fairly large following up that believes that price behavior is at least price reverting in the short term.

I got lucky, I basically flipped a coin and HAPPENED to do it on a day where the SP500 moved a LOT. moving averages do TERRIBLY in environments where the market doesn't trend hugely in one direction. I think I talked about that a bit later.

On that note though, I still work with this, though my approach has changed dramatically. Its certainly possible to structure a trading strategy to fit your risk profile.

Nobody can win every time, but you can design the strategy to provide losses you are comfortable with.

Regarding tweaking buy/sell algos to predict future movement though, there's plenty of literature on that on both sides, so I won't really argue with you.

If you're itnerested, I recommend reading about high frequency algorithmic trading. You can also read my similar blog posts about why I think technical analysis is absolute drivel and the potentical justification for running a moving average algo.

sdfx• 18 years ago

I think the no-arbitrage principle comes into play as well: If there is an (easy) set of rules that you can follow to make money, then there are enought people to act according to these rules so that you can't win anything. Seriously, this simplistic view of the market is just a threat to your hard earned bucks.

There are historical prices available at finance.google.com. Backtesting your strategy before playing around with real money is probably a good idea.

matt13• 18 years ago

Again, that assumes that the future can be predicted using past results. Even if you had an algorithm that seemed to predict the dips and peaks in the market, it would not be a good predictor of future performance.

I recommend Random Walk Down Wallstreet or Fooled by Randomness or, if you really want a brutal introduction to randomness, play and study the mathematics of poker.

wildwood2• 18 years ago

How high to you have to jack up a) the number of people who believe in this principle, and b) the number of simple ways to make money (possibly multiplied by the number of available markets), before this principle is no longer true?

mixmax2• 18 years ago

using past performance to estimate future performance simply does not work

This is not always true.

I had a theory a few years ago that went like this: The price of a stock is a direct function of the perceived price of the company multiplied by a risk factor: The more risk the less the stock is worth. On the day the yearly report is publicised for a company the risk is big just before the publication because nobody knows for sure what the numbers are, and low just after the publication because everybody now knows. So according to my theory the stock price of an arbitrary company should statistically go up on the day that the yearly report is made public.

I, painstakingly, found some historical data on this (it wasn't easy) and found that it was spot on. A bit of statistical analysis showed thet there was a definite gap to be exploited.

A friend of mine showed in his Masters thesis that there were certain patterns that would almost always be present in IPO's that could be exploited if you knew them.

So there are definitely loopholes where past behaviour shows future performance, but not a lot of them.

And professional investors aren't always as smart as they're made out to be. I know a few, and hackers are a lot smarter in regard to numbers.

mattmaroon13• 18 years ago

The problem is that the market is dynamic and chaotic. Measuring past data doesn't give you much indication of how much your algorithm would have made, even in hindsight, because every buy and sell you would have executed would have changed the market and the future. Even relatively small orders can have big ripple effects, especially if they just happen to trigger standing limit orders.

Genuinely measuring the market (by trading) changes it.

drusenko• 18 years ago

this is really interesting to me -- i spent a lot of time examining implied and actual volatility with regards to option pricing right before an earnings report. the short and skinny is that (as makes sense) volatility rises right before earnings are released and falls right afterwards. if you know that volatility is going to rise, you could easily plug the rest of the numbers into the black-scholes model and find undervalued options. they weren't always there, but at times, you could find options that would lose less in value due to time decay than they would gain due to the increased volatility with enough volume to not start making the market -- a great arbitrage opportunity.

unfortunately, i didn't have as much time in college to study this as i would have liked, and all of the good volatility data seems to be hidden behind a pay wall (bloomberg stations!)

one thing is for sure: even though the market approximates efficiency, there are still arbitrage opportunities to be found in the right places.

marvin• 18 years ago

There are probably lots of loopholes, but we don't know about them. It can't be a coincidence that the largest hedge funds have beaten the market spectacularly every year the last 20 years. (And if they put 10% some of those gains in a money market account, they are guaranteed to have made positive returns no matter what happens).

My personal this-is-what-i-think theory is that there are lots of patterns in the pricing of equities and other market components, but if they ever become publicly known, they cease to exist. The best hedge funds (or best traders, take your pick) manage to find patterns that no one else does. This does not protect them from a spectacular implosion if their models for some reason become invalid.

There is a cult of believing in the perfect randomness of market pricing. Saying that market developments are random is practically the same as believing in the efficient market hypothesis. The market cannot be perfectly efficient, because there are always interactions that no one will be able to predict. Most of these interactions are no doubt chaotic (unpredictable), but there is no way that traders instantly discover every pattern that is predictable.

steveplace12• 18 years ago

That risk you speak of may not be discounted in the price, but rather in the implied volatility. You'll see that after major earnings reports/announcements there is an IV crush on the options board.

You can game this by looking at historical IV for pre-earnings and see if the current is over/under. You can then sell straddles or strangles if you think the price will stay in that area.

It's even better for GOOG because they always release earnings right before options expiration, so there's a ton of voodoo going on in their price.

Dilpil• 18 years ago

People have been using computers to trade since the 80s. It is estimated that in some markets (Forex, Commodities), more than 50% of the orders are put in by machines.

ruby_roo• 18 years ago

Heh, so this has piqued my interest. I have absolutely no experience in online investing/day trading, although I'm pretty sure a lot of you are veterans.

Any books you'd recommend to a programmer with day trading aspirations?

pjharrin5• 18 years ago

http://www.amazon.com/Technical-Analysis-Financial-Markets-C...

fattyfatfat11• 18 years ago

http://fattyfatfat.com/2008/10/automated-day-trader-most-tec...

I still stand by my above claim that Tech Analysis (and especially LONG term trending) has no theoretical basis, except for the fact that everyone else believes in it.

fallentimes2• 18 years ago

I'd learn about finance before you learn about day trading.

The Intelligent Investor - Warren Buffet's favorite

A Random Walk Down Wall Street for one perspective.

Mark Douglas books for a different perspective

Options Volatility & Pricing for the technical stuff.

And Inside the Mind of a Street Addict for the bathroom read.

fattyfatfat11• 18 years ago

Intelligent Investor: absolutely. My first investment book. My deep suspicion is that THIS book will be more important in the next few years as company valuations tank. Even now tons of firms trade below book value, which was one of Ben Graham's great criteria. For years this has been impossible to find, but with the credit crisis, its back. Now... to choose the good ones...

Options Volatility and Pricing by S. Natenberg (sp) is a great theoretical primer for options, though typically a bit dense for people outside the industry. The writing style is brutal, but this book has probably made more millionaires than any single other book in history. Walk around the option exchange floors and every clerk has a copy, to this day.

mattmaroon13• 18 years ago

Yeah, don't daytrade. It's a sucker's game. The market is too close to efficient for you to recoup what you lose in brokerage fees and excess taxes.

Fund your IRA to the max, and if you're 20+ years from retirement buy all ETFs with low expense rations. If you're closer to retirement, buy fewer stocks and more t-bills, etc.

steveplace12• 18 years ago

The market is too close to efficient for you to recoup what you lose in brokerage fees and excess taxes.

No, it's not. Far from it. EMT is not practical in the short term.

Brushfire• 18 years ago

Its hardly a suckers game if you know what you are doing. I know prop traders that make huge bank essentially daytrading on the forex and others.

Sure, its highly controlled gambling, but you of all people should realize that its not a losing game for everyone. If anything, its just a suckers game for small timers -- like all other gambling.

steveplace12• 18 years ago

There's a ton of financial blogs that would help you get started, and those can be more valuable than books. The ones I read are on my blogroll at investingwithoptions.com

Read Van Tharp's Trade Your Way to Financial Freedom it's a must... teaches you that the entry is not important. It's the position sizing, risk management, and the exits.

Also: - Options as a strategic investment

- Mind over markets

wildwood2• 18 years ago

Anything by Van Tharp. He trains traders at all levels for a living. My personal favorite is "Trade Your Way to Financial Freedom".

SwellJoe• 18 years ago

So, the obvious question for me is where can I buy stocks for $2.40 per trade? Any day trading successes I might manage would be eaten up by transaction costs at my current broker (where trades are $9.95, I think). I'd probably be a far more active trader at $2.40 (which may not be a good thing, but cutting costs is always good).

fallentimes2• 18 years ago

I think you can from these guys if you qualify:

http://individuals.interactivebrokers.com/en/main.php

Tradeking is $4.95 per trade.

brianr• 18 years ago

TradeStation is $0.01 per share for equities (for the first 500 shares; $0.006 after that), $1/min per trade: http://www.tradestation.com/brokerage/commissions.shtm

fattyfatfat11• 18 years ago

I use interactive brokers.

The cost of a ES mini (SP500 mini future) trade is $2.40.

Stocks trade for half a penny to a penny per share with a minimum of $1.00 per transaction.

I think they require 20k to start a new account these days though.

IB has been by far my favorite brokerage

kmt• 18 years ago

For those who use IB: How long have you been using them? Do you use their client or their API? Is it alright to use both, in parallel? People complain about their customer service; have you had any problems? Is it easy to transfer money to/from your IB account?

steveplace12• 18 years ago

If you're not going to daytrade, go with zecco.

I use thinkorswim because I'm an options guy.

tmitchell• 18 years ago

$3/trade at SogoTrade

fattyfatfat11• 18 years ago

um well, hello. so thats my website. quite the site here. and quite the surprise to see that i'm getting any attention at all. a lot of very intelligent commentary.

Prrometheus2• 18 years ago

All successful day traders are lucky. People who give day trading advice are frauds.

That's not the most polite thing to say. Some of the people who give day trading advice might even be sincere and not know that they are frauds. But it's the truth.

fattyfatfat11• 18 years ago

And lastly: I wrote a lot of that just as I was figuring things out, so I don't know how much of that I still stand by. But this morning, I wrote the one thing that I'd recommend to anyone who is interested in this sort of thing.

http://fattyfatfat.com/2008/12/moving-average-crossover-theo...

hedgehog• 18 years ago

I read through your posts but I didn't see whose data you used for backtesting, did you use Interactive Broker's?

apstuff• 18 years ago

boolean TraderAnxiety(boolean mktStatus) {

  if (mktStatus == FALLING) {
    Sell();
    return true;
  }

  if (mktStatus == SURGING) {
    Buy();
    return true;
  }

  if (mktStatus == FEAR) {
    Loathing();
    return true;
  }

  if (mktStatus == OVERMYHEAD) {
    UseProfanity();
    return true;
  }


  return true;

olefoo2• 18 years ago

Your `boolean` has 4 values?

Most languages I am familiar with require booleans to be either TRUE or FALSE, although I have met a few where undefined or NULL are possible values.

steveplace12• 18 years ago

It returns true in all 4 cases.

blasdel• 18 years ago

Yes, there are four boolean values, at least electrically: zero, low, grey, high.

steveplace12• 18 years ago

1. Not having a stop loss (other than the 3500 circuit breaker) is a terrible idea in black box trading.

2. Yes, it is that simple. Note that simple != easy.

paddy_m2• 18 years ago

I'm the CTO of a startup named QuantRunner Software, where we write backtesting software, (beta coming this month) http://quantrunner.com . I found the article interesting, but it leaves out some important details such as

1. Why did he decide to enter into this strategy at 10:45 am on October 15th? 2. What would the outcome of the same strategy have been if it was left running for the next month, for the past year, for the past 10 years.

I'm curious.

Questions about how the backtest was run.

1.How do you get your data? 2.you seem to have written an excel spreadsheet to run the backtest, what's going on with that? How did you design it?

For other people on HN, does anyone here use backtesting tools? What do you think of the existing software you use?

martinflack• 18 years ago

A year ago I embarked on a project to learn Common Lisp by building a trading system, to execute with the Interactive Brokers API.

I modeled the woodiescciclub.com trading strategies, primarily because the math is simple and the patterns are well defined. However since then I've seen other parties on the web talk about how the Woodies patterns actually don't make money consistently, although I didn't corroborate this.

I actually found CL to be a fantastic language for this. I was writing up the Woodies patterns using a DSL I had created:

  (defpattern zlr "Zero Line Reject" :with-trend
    ((count 1)    (within  100  250) (trend :up :or-opposite-invert))
    ((count 1)    (within  100  200) (trend :up :or-opposite-invert))
    ((count 0 10) (within  -50   99) (trend :up :or-opposite-invert))
    ((count 1)    (within  -50   50) (trend :up :or-opposite-warn) (angle :down))
    ((count 1)    (within    0  115) (trend :up) (angle :up) (away 8)))

  (defpattern hfe "Hook From Extreme" :counter-trend
    ((count 1)    (within  200  300) (trend :up))
    ((count 1)    (within    0  199) (trend :up) (angle :down) (away 3)))

   ...etc

The defpattern macro was creating, for example, #'is-zlr, #'is-zlr-up, #'is-zlr-down, which were then used by a trading engine that monitored 5-minute bars on a given futures contract and launched trades.

Another CL feature, restarts in the condition system, helped too. When the data feed broke or got corrupt, an exception thrown which could reload the data feed and restart back in the listening loop without forgetting any context was helpful.

Also just running in a Lisp image was great because I could swap functions during a live feed without stopping the program.

In the end, the programming worked great, but the trading system lost money. I had it working in backtesting over a few months and then papertrade mode for weeks, and then when I took it live, the volatility rose and it started hitting the stop all the time. I adjusted things like stops based on ATR, but I really just ran out of my little budget to play with it.

It did however teach me CL. ;-)

Modern trading platforms have built-in tools and programming languages and writing things from scratch in CL is really just an academic exercise.

I believe it's possible to do algorithmic daytrading, but quite a bit more difficult than it seems. There are way more market behavior modes than you can appreciate at first, and the keys to success lie more in counterintuitive aspects of your system like position sizing rather than intuitive aspects like entry strategy.

The best talk I heard from someone on the subject indicated that it takes years and the end result is a fairly sophisticated algorithm-switching engine, because the hard part is just to survive.

quellhorst• 18 years ago

So this guy wants to automate trading with $3.5k? You need at least $25k with a cushion otherwise you can't day trade.

known• 18 years ago

http://en.wikipedia.org/wiki/Fixed_income seems lot simpler strategy

Tichy• 18 years ago

Like many hackers, I often pondered the idea. The closest I got was automated trading in a stock market game run by the company I was working for. I never got round to programming a sophisticated strategy, so basically it was just "sell and buy random new stock if price has risen or fallen more than x%", where I think x was something like 15%. Even with that the algorithm was in the middle of the field (with 10000 participants), but it still lost a little money. As it was 2001, losing money was to be expected, I guess.

Using an automated day trader to generate income

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