Chaotic Trading
Why Don’t We Just Trade Anymore?
I suppose I am a little old school when it comes to trading, but my system has worked for years and I see no reason to monkey with success. Don’t get me wrong, I occasionally experiment with new indicators or oscillators, and change up the time periods I am trading. I am not a dinosaur, so to speak.
But the recent advance of an army of automated software programs is bewildering. I have beta tested several of these programs and have been less than awed at the performance these programs turned in. Further, I keep asking myself, what in the world do we need all this automated trading for? To be sure, automated trading programs have a very difficult time differentiating between different market conditions. They do extremely well in trending markets, but I could train a monkey to effectively trade a trending market. However, choppy markets are a completely different matter and the automated trading programs I tested were less than useless in this market condition.
But the popularity of automated software trading begs a far more basic question. Why are we turning to computers when our own brains have a far greater capacity to assimilate information than any computer? There seems to be a belief that computers are somehow superior in trading capability than the human brain. Nothing could be farther from the truth. Your brain possesses many multiples of computing power relative to even the most powerful computers. Even more important, your brain possesses the ability of abstraction. So why are we selling our cognitive abilities short?
I have several theories on the computer phenomena, all of which are nonscientific and strictly subjective. We have come to trust computers for their accuracy, as seldom make mistakes. Quite simply, they are as accurate as the input data they harvest, then they spit out remarkable results with amazing accuracy. Computers are an especially accurate at analyzing static data, or historical data. But that’s the problem with trading computer programs; generally speaking past trading patterns are irrelevant to what might occur in future trading patterns. (I can hear the technical traders, especially the chart formation guys, groaning in agony) but in a predictive sense, computers only have past data to formulate what might be in the future.
While I am not an Efficient Market Theorist, I do believe there is a certain amount of randomness in the market. And that’s the fly in the ointment for automated trading programs. Attributing meaning to market noise results in chaotic and unreliable buy/sell signals. This is one of the phenomenons I observed when testing automated trading programs. Despite several very good buying signals generated, there were a plethora of spurious buy/sell indicators that had to be sifted through for accuracy.
Another thought I have concerning automated trading programs is the lack of confidence we have developed in our own trading abilities. Perhaps trading technique has deteriorated to a point where we are not confident in our own decisions and would like a backup opinion to bolster our confidence. On a more humorous note, if the trade backfires, we can always blame the computer for the mistake. Possibly even give it a good swift kick, for continued computer operations I would suggest a minimum of swift kicks, as computers are not exactly robust in their design.
I don’t suppose automated computer trading programs will initiate the demise of modern culture. But they are indicative of the dying art of pure trading, and that is a real shame. No computer will ever match the genius of a master trader. In a way, they remind me of the advance of the calculator, and the well-documented demise in school children’s math skills. No, the more I think about it, I have decided that automated computer trading has no part in my trading program. Not ever.
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November 6, 2010 9:54 am
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