6 Ways Your Decision Support Tool Helps or Harms Your Trading
6 Ways Your Decision Support Tool Helps or Harms Your Trading
Oct 4, 2006
The Wall Street Journal ran this headline on page B1, Saturday, September 30, “Your Portfolio on Autopilot – Brokerages Roll Out Software To Automate Trading Strategies – Risks of Becoming a ‘Quant’“.
Brokerages will move mountains to attract active traders to their camp with trading tools – and are increasingly indifferent whether its developed internally or acquired externally. From the article it’s clear to us the characteristics these trading tools have.
Characteristics of attractive trading tools:
- Performs intensive data-crunching to test strategies and improve decision making
- Determines if that strategy’s success is coincidence or potentially reliable and repeatable
- Removes some of the emotion of trading and allows a trader with a trading plan to be more disciplined in following it
- Requires little programming effort to customize and develop
- Informs a trader if a strategy is in-tune with the overall market’s behavior
- Levels the playing field between amateur and professional
We read the article several times and decided to forgive writers Aaron Lucchetti and Justin Lahart for not mentioning Trade-Ideas. Our letter to them features sections of the article and our 2 cents. Parts of it appear below.
“Previously, tools like these were the exclusive domain of whiz kids with Ph.D.s hired to design complex trading algorithms for hedge funds and giant institutional investors. Known as “quantitative” strategies or “program trading,” it involves setting up specific sets of rules — say, buy 100 shares of Stock X if the Dow rises a certain amount for several days in a row — based on intensive data-crunching.”
Trade-Ideas brings the intensive data crunching capability to the average trader. We track every stock on all the exchanges using a growing list of alerts and filters to do this. This is sweet spot we now own. Our customers don’t need a Ph.D but can have access to that type of power. No need to be a programmer.
[Quantitative strategies and historical stock data] is proving to be popular with investors. At TradeStation Group Inc.’s brokerage unit, where automated trading already makes up a significant percentage of the business, trading is up 50% from last year and the average customer now buys and sells 47 times a month.
Up 50% is a very big number. TradeStation, while being the leader in this space, is extremely complicated for the average trader. What they have going for them is the fact that their average customer buys and sells 47 times a month. That is considerably more than any competing online brokerage customer. Trade-Ideas’ arguably simpler interface and more powerful real-time analytics hold the promise of similar trading activity for brokers seeking this type of activity. Traders can take the first step in asking their broker to pay for their Trade-Ideas subscription. It never hurts to ask.
TD Ameritrade Holding Corp. plans to start rolling out automated trading for its six million client accounts as soon as next month that is designed to mimic some of these functions.
The competition is coming into this space hard and fast. The fact that one of our partners Scottrade already has Trade-Ideas gives Scottrade a big advantage.
One of the biggest risk areas for newbies, says Michelle Clayman of New York money manager New Amsterdam Partners LLC, is the data mining. It is possible to look at historical data about market behavior and find all sorts of things that appear to have worked in the past — but without extensive testing, it is hard to determine if they would work the same way again or whether they simply represent a coincidence that might never be repeated.
The Odds Maker, to be formally released November 1, resolves this issue. It allows the users to continuously monitor trading strategies for returns. It assumes you are going to keep running the Odds Maker to make sure the strategy is valid. The appropriate analogy is this: If you are a card counter in Vegas, you would not be counting cards once and then placing bets based on that count. In order to have an advantage over the house you have to continuously keep counting the cards. Same goes with the Odds maker. You will continuously run the Odds Maker to make sure the strategy stays valid. The whole assumption of the Odds Maker and the reason why it looks at the more current data (15) days is so that you are not trying to work a system that is based on old information.
In many ways, automated strategies like these level the playing field by giving investors some of the same tools the pros have been using for years. It helps them get trades sent into markets more quickly, and by giving them a preset strategy, “removes some of the emotion” from investing, says Franklin Gold, a vice president at Fidelity’s brokerage unit.
This is why having a tool like the Odds Maker becomes very appealing. You are not having to rely on the process of trial and error, which is psychologically frustrating and financially dangerous, to figure out if a trading strategy works or does not work. You have the hard numbers directly in front of you.
Another problem, says Paul Bukowski, a portfolio manager with Hartford Investment Management, is that sometimes even tried-and-true methods can stillput an investor into too many of the same sorts of stocks. That lack of diversification is risky because if a particular sector gets hurt badly, the portfolio could be in trouble.
This is another problem that Trade-Ideas and the Odds Maker solve. Trade-Ideas does not only look at a portfolio, although it can, but rather creates one on the fly, by showing users all stocks that meet certain criteria right now, something that nobody else does. The whole universe of stocks is being monitored and only the appropriate ones are flagged. When you add the Odds Maker, it will keep the trader trading stocks that exhibit a certain pattern that is working in the market right now. Since the end user keeps running the Odds, they will always have a heads up to when the conditions change.
Vladimir Ivanov, an auto mechanic, decided to try his hand after he took evening programming classes and found several Internet sites where programmers discussed strategies like these. He opened an account at Interactive Brokers and at first made money in a program he designed to buy and sell groups of stocks at once, a so-called “pairs” strategy.
With Trade-Ideas and Odds Maker you really get rid of the need for this programming business and open up the data crunching capabilities to the average user. This is where TradeStation falls very short. If you can imagine the resources needed to build another strategy for Vladimir versus a Trade-Ideas customer who simply: hits configure in her Trade-Ideas window, changes a few settings and then runs the Odds Maker to see if those changes are valid. If they are not, then the customer immediately saves valuable time and money by not trading a non-working system right now.
According to Mr. Asness, one of the key things successful investors do is know when not to believe in the investment strategies they have cooked up. That is particularly tricky for amateurs, he says, because they might not have old hands to bounce ideas off of and help guide them away from danger.
Most online traders (with the exception of our readers) are amateurs when categorized by levels of capitalization and often don’t know what works and what does not work. This is the problem that we at Trade-Ideas are resolving with the combination of the Trade-Ideas alerts and the Odds Maker. The Odds Maker by giving them the numerical readout is the element that will provide the help and at the same time guide them away from danger.
Measure Trade-Ideas by the list above and you’ll find we score close to 100%. Evaluate other decision support tools by the same list or any other you think is valid. We would love to hear what criteria you choose.