Stock market trading, emini trading and Forex day trading, have been taken over by robots!
It’s estimated that more than half of stock market trading is performed by automated computer programs – algorithmic trading that executes orders automatically without human intervention.
The most infamous type of automated trading to come under recent scrutiny is “high frequency trading” in which computers calculate small inefficiencies in the stock market and attempt to take advantage of them quickly before they disappear – often for only a few seconds.
Are the robots taking over the world? After all, money makes the world go ’round, right? … oh, wait, no, that’s supposed to be love!
But I digress.
Hedge funds, pension plans, mutual funds, and large financial institutions are using computer programs to make decisions about when to enter and exit the stock, Forex and futures markets, and also to execute those trades automatically.
The fact that so many of the “big money” players are using automated trading indicates that there may be some validity to it for successful Forex, emini and stock market trading.
On the other hand, there are myriads of trading “robots” offered to retail traders, and most of them see to only disappoint.
- Are computers better traders than humans?
- Can the market really be reduced to a mathematical formula?
- Will a highly skilled professional trader always be able to out-perform a robot in the markets?
- Is the dominance of computer trading a good thing for the world financial markets?
Let’s see what you think!
PLEASE COMPLETE THE POLL BELOW. Simply indicate your opinion on the 2 questions. Also be sure to bookmark this page and come back in a few days after others have voted to see the results of the poll.
ALSO – PLEASE EXPAND ON YOUR THOUGHTS BY LEAVING YOUR SPECIFIC COMMENTS BELOW.
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I would never use a robot. I have a brain. When a large number of trades are made by robots, the rest of us lose a very important aid to trading – the psychology of traders. Robots have no psychology and they lack any emotions – fear and greed. I’d rather be competing with humans who I can figure out, than computers.
I believe computers rule because they have the majority share of the volume. They carry all the algo volume with their split second decisions. This is not a bad thing. Big Iinstitutions are comfortable with an average execution and therefore algo-most of their volume. To stay a step ahead of them you just have to understand what the algos think and react too.
I can see programming computers to pick off small wins in huge quantities. I don’t like it because it can and probably does change the market for the rest of us little guys.
Adaptability is important in trading and human’s can
Hi Dr!
I have tried everything! EA’s the lot!!
I think human involvement creates higher winnings. I want the Robots to keep trading so I can skim off some of their losses. I have been successful taking opposite positions against a couple of the Robots I purchased over the years and I still run on 1 micro lot just to see their trades.
I don’t know if it’s a good thing or a bad thing. Algorithms are tuned periodically to take decisions that otherwise humans would.
I guess they are quicker at spotting arbitrage opportunities and taking advantage of them. In which case humans wouldn’t have enough time to react to these opportunities and thus the opportunity would disappear before it is even spotted.
In any other case they are probably just as good as the traders who created the algo and the people who tune them.
A small example of what happened with one of the biggest hedge funds, GS Global Alpha in 2008. I believe it lost more than 50% of its $10bn market cap in a short span of a few days in 2008 because of rampant selling and in the process drove the whole market down. People who spotted the trend profited enormously but people on the wrong side got pummeled. Global Alpha had to close down shortly after. Would you call that a good thing or a bad thing, and for who?
Hi Barry,
I think that trading has some common features with chess.
And I am able to develop a software than run over a standard computer plays chess far better than me.
So I think that with trading should be even better, because:
1) if you trade at your discretion your emotions will betray you and you will make mistakes.
2) If you follow a strict set of rules, a computer can do it faster than you and 24/7/365 without getting tired.
The trained human computer, with its millions of years of evolution and advanced pattern recognition abilities is doing something quite clever that is not easy to encapsulate in an automatic computer system. Computers will find easily recognizable setups but won’t appreciate the big picture.
Computers are more patient in waiting for setups, faster at trade execution, and follow their rules exactly. It’s not that I don’t trust them, just that I wish I was that good!
Computers are very good at certain things.
1 Executing (unemotionally) the programmed plan.
And we should all have a plan.
Entry (Size and price), exits (stop loss and take profits)
2. Speed and concentration. Computers are much faster and don’t get distracted.
The programming defines it all. People do the programming (yeah People).
Why don’t they work long term? Well, Market conditions change, and the Plan no longer works well. Pros have bought copies of the Robot and reversed engineered it and can now destroy the effectiveness of the Plan. Do they do this? I think so. I used to work for a company where one of my “jobs” was to find ways around patents of other companies. The smartest companies keep “trade secrets”, and don’t file for the patents until they have a better way developed.
If someone can show me a robot that makes me more profit than loss of course I would use a robot.
I can trade myself while a robot is trading for me as well, that would be very efficient.
So where is the super robot? :0)
Computer trading could be a good thing for the informed trader. Trading with the institutional algorithms can be profitable for the human trader. The big boys move the market where they want it to go. Find out what GS and like look at and at what price and it is a Gold mine.
You can spot certain times during the day that the algos turn on. There is clockwork to most of these algo trades and the bigs probably work same agreed on price levels to stick it to the retail traders. Learn these times and it could help you out.
the earlier comparisson with chess is quite accurate.
When I backtest my system over the last 11 years, it shows spectacular good results as carried out by the computer,despite some bad trades I never would have taken. My actual results are not near as good because of my interference with the system due to emotions.
The advent of these computersystems is neither good or bad, just trading noice and the more sophisticated these programmes get, the harder it will be for them to compete with each other( law of diminnishing returns)
Regardless of the trader being a person or a robot the statistic of 95% of market participants losing still remains. Although that appears to be a negative statement it actually defines who in the market is actually winning. The participants that cut their losses short and let their winners run are in profit despite the percentage of losses being higher. I have tried hundreds of commmercial robots and none are consistant, so don’t go off buying one in the hope that it will work. It’s taken me a few years to develop my own robot and find consistency for it, though not with any optimisation, it’s more about money management and risk management, they are individual ingredients. Whether you are a person or a robot you still need the right ingredients to succeed.
The only reasons I favour robot trading is:
1. It consistantly follows the rules.
2. Psychology is not a factor in decision making
3. Runs 24 hours a day without a break
4. A backtest is available
Trading algorithms have their pros and cons, on one hand they consistently execute a set of rules in response to market triggers without introducing emotion based errors but their limitations are obvious where skills such as pattern recognition logic are rather cumbersome to code and require tuning to match current market conditions.
Any trader, individual or institutional can code an algorithm for any of the popular trading programs which support integrated trading and a scripting language. I don’t see any harm in trading systems that trade over a broad distribution of equities and commodities without dominating liquidity in any individual market.
I do see a potential for abuse based on what federal legislation permits – any trading system that involves exchange resident computers dedicated to institutional clients where front running of quotes prevails (quotes seen by select traders with a time advantage relative to the rest of the market), will undermine public confidence in the market and will be a major step away from tried and proven protocol for a fair and stable market.
not right now, but maybe sometime in the possible in the not to distant future. after the devil takes over; after im long gone.
For now, I think that in general, humnas are better than computers at trading. there are the short-lived arbitrage setups mentioned in the blog that are of course best handle by an electronic “mastermind”. However, for trading under the same conditons as humans, just as we saw the evolution of computer algorithms for playing chess resulting in computers beating world chess masters, further algorithm developments for trading will eventually make computerized trading supreme. They can access and evaluate millions of trade setups and take make statistical risk vs. reward determinations that humans simpy cannot do in a timely manner. Along with money mamgement plans, these robots will be the supreme traders. Also, with advances in “adapative reasoning” programs (today’s adaptive neural networks are the seed that will spawn these), the computer will be able to adjust trading sytles in a “smart” way as the trading conditions change, similar to what human traders do.
I see in a Jims comment “People do the programming (yeah People)”. This is no longer completely the case. Programs have been developed that write programs! As with most technoogy, expect to see future programs that are more robust and contain fewer bugs than we have today. On the other hand, expect to see some sophisticated programs that contain some subtle, nearly impossible to discover bugs that may result in the program producing flawed output with no one being aware of the errors.
It’s a fairly asinine poll. The issue is a bit more complex than the two questions poised in the poll. A very disciplined and dedicated trader in my view could achieve better results than a good computer program in the long run, even if the software was programmed to adjust to varying market environments.
I also think that a less than dedicated trader would
be far less effective than a good computerized system. Either way an undisciplined trader will lose whether being a discretionary trader or trying to follow the rules of a programmed system.
I cannot entirely trust the robot simply because it acts on some preset instructions. It could be only useful when things go your way.
However the market is so dynamic in that I’d rather do the prcessing with my natural brain and make decision at will.
Paul, I felt the same way. How can I trust a machine? I think trust is part of our psychology too. It’s necessary for our survival to build models of understanding within our gray matter to interpret the safe versus unsafe things in our world. Only with experience can we develop a trust of things around us. A couple of examples: Do you feel comfortable about the car you drive with all it’s 100’s of parts operating every second? Do you feel comfortable about your own body maintaining it’s millions of cells to keep you alive?
It’s only natural to distrust machinary, but we do have to live with it on many levels.
The human brain and computers both have their advantages and disadvantages. Things the brain can do, computers can’t do. Things computers can do the brain can’t do.
Computers make life much easier and simplier. The brain can’t work as fast as computers can. The time it takes to do certain things would be much slower without computers. Computers would be useless without the human brain.
Eventhough I agree with the rest of the crowd. But there are times esp in my case ; I am a Cabbie and I driv ethe whole day from 10.30 AM EILL 3.30 pm THEN come home and rest for a couple of hrs and drive thru till MIDNIGHT,I rhink that the Robot can do some work for me in my absence.But the Auto TRADING offered by FXCM requires that you have the computer on all the time which defeats my purpose of wanting to use it during my drivivg time. IF other wise it would be of some help .
Surely the robot will be the better trader because it follows the rules with no emotion, nor does it have any concern about keeping a stop or taking a loss.
I believe that algorithms are superior and have the edge for institutional style trading (a couple of ticks with large lot numbers syphoned in with no commissions).
A retail trader cannot afford the lot sizes to make this profitable & the commissions would kill them.
However, I believe that retail traders are superior and have the edge for their required style of trading (much larger average targets with much better risk to reward setups).
Algorithms would not be consistent enough in the long run, given markets are not black & white but very grey (especially over longer periods of time).
HFTs manipulate the market and can cause frustration (read: loses) for unaware traders.
Like many of the commentators, I believe computer generated bots trade without the human factor (i.e. emotions, fatigue, etc) and can process trades expertly when it comes to following rules. However, what mechanized trading does not have is the ability to discern fundamentals. I vote for humans, despite our pychological shortcomings.
Definitely I think robots are bound to be superior traders because they have no emotional involvement in the trades. Personally I think they will outperform human traders because of their technical orientations. Considering that only a very small percentage of traders make money, surely these robots can do better than that! That being the case I would LOVE to have one!! 🙂
Are computers better traders than humans?
Computer trading algorithms reflect the skills of the programmer and the skills of the expert(trader) who provides the programmer with the trading rules.
Can the market really be reduced to a mathematical formula?
Certain aspects of trading can be reduced to formulas which trigger rules. Successful trading is about shifting probability to your side and away from other traders.
Will a highly skilled professional trader always be able to out-perform a robot in the markets?
The professional trader could out-perform the robot that he developed.
Is the dominance of computer trading a good thing for the world financial markets?
Computer trading reflects the trading expertise of the professional trader that designed the system. Computers can make the same mistakes as a trader, but at a much faster rate.
Funny…this was asked on a recent Facebook trading group and the answers were overwhelmingly favored towards humans – surprised me!
I think computers are better because they have no emotions. Emotions really affects human actions. Artificial intelligence will get better over time and will dominate trading.
The real key to proficient trading is to communicate with the subconscious mind and CHANGE the existing trading mindset program that exists there(if you have been trading unsuccessfully that is) It is actually quite easy if you understand how the subconscious mind is our true CONTROL CENTER and always moves us towards successfull completion of the EXISTING program by a process termed Reticular Activation System. “As you think, so you ARE!” It is that simple. IF you think you will lose that trade, Guess what happens? Successfull completion of your mind’s programing completed, and you lose that trade , AGAIN!! I have a background and Certification in Advanced Hypnotherapy, Neuro-Linguistic Programming(am working on my Master Certification) and am also a certified Life Coach, so i understand the human mind in depth. If you need assistance, there is always help available, if you know where to look, of course!!! Change your trading program, change your trading results!!!
Barry,
Thank you for tackling this important and interesting topic. I believe your Part 2 blog post says it very well. Here are two additional comments:
All of this computerized trading has added tremendous liquidity, which is a good thing for small retail traders.
The HFTs and other automated trading make the very short timeframe difficult to trade. However, the opportunity is still there for a slightly longer timeframe.
Jeff Nelson
I have been trading full time for over 3 years… my only job and source of income. I recently learned enough programming to automate a couple of systems that I trade and I run them concurrently. They do way better than I do because of the emotion factor and they are faster… plus, I don’t have to stare at my screen all day! That being said, I definitely am better when my emotion is not involved, when I view it as a game, I can see things that the computer can not…. but I would rather have a life.
There are some good robots that MAY help you. Some are scam. Others are for real.
Simply put, a Forex robot is a program that attempts to take the guess work out of trading currencies. Currently there is a lot of information floating around the internet about these products. Like any other tool, it needs to be used properly in order to be most effective.
Regarding High Frequency Trading, Day Traders will get killed trying to do intraday trading. HFT computers are located in stock exchange datacenters and obtain direct feeds from the exchanges’ trade matching engines. These computer programs do not take prices from consolidated feeds. Furthermore, they execute trades in millionths of a second using technical analysis techniques and various trading algorithms. They are always trading ahead of a day trader.
If Day Traders think they can beat these HFT computers, they are deluded. By the time a day trader wants to put on a trade, the market dynamics will have changed because the HFT computer will have executed their strategy.
It is time for Day Traders, with their good technical analysis skills, to consider fundamental analysis and look at a longer term investment horizon.
Barry I definitely think that computers are better at trading, just look at High Frequency Trading and the amount of profit made there by involving the best software created by the best engineers.