An Early Instance of Man vs Machine Holds Lesson for Traders

Trade-Ideas is going automated! How can a human be expected to compete against a machine in an unfair competition? The legend of American pioneer John Henry foreshadowed a similar situation facing traders today.

John Henry’s reputation as the greatest “steel-driver” in the mid-18^th century began during the push to extend the railroads across the mountains to the West. The complication of the story is that, as machine power continued to supplant brute muscle power (both animal and human), the owner of the railroad buys a steam-powered hammer to do the work of his army of manual labor. In a bid to save his job and the jobs of his men, John Henry challenges the inventor to a contest: John Henry versus the steam hammer – one of the first contests of man versus machine. John Henry wins, but in the process, he suffers a heart attack and dies.

That is the legend and in the end John Henry dies. In trading however many investors and professional traders continue to battle in John Henry fashion hoping that in the end they will beat the algorithmic machine. The movie, The Matrix, offers a cinematic modern day description of what’s happening: the machines, in the hands of more capitalized players, win and win big. Algorithmic trading continues to grow as a share of overall volume and in their sophistication. Market veteran Bob McDowall writes in his article, Algorithmic Trading: future business and technical developments:

“Hedge funds will continue to play a significant role in the development of algorithmic trading. They provide some 40–50% of the equities transaction volume on major US and European Exchanges, 70% of convertible bond volume and 80% of distressed debt volumes. They have lead the charge and are at the “bleeding edge” in deployment of algorithmic trading on the buy side of the business either directly or through the use of their Prime brokerage relationships. The proliferation of hedge funds means more competition amongst them. They have to differentiate themselves through the range and innovation their products and services, including their trading strategies.”

How do the rest stand a chance?

To beat a machine, use a machine – one designed to recognize trading patterns and determine for a trader how to trade it. However this isn’t a battle against the large institutions or more capitalized players, but rather a discovery as to which side to take when buyers and sellers clash.

When we launched The Odds Maker in January of 2007, we set our machines to help wo/man by revealing which combinations of alerts and filters in Trade-Ideas produced profitable trading results in the market, but what followed is sure to be the next boom in direct access trading.

Our customers worked with The Odds Maker. A small group of vocal group of traders in CA especially labored and tinkered with settings to create amazing algorithms that produced incredible win rates, average winning to losing trades, and net winnings. The problem was John Henry. At some point they realized that it was impossible for a man to quickly enter 15 orders in one minute (an effort The Odds Maker required in some cases to take the money out of the market). So our customers came to us and said can you automate it? Can you make me a maestro instead of a work horse? We thought about it and the answer was clear. We not only should it is our obligation. TradeStation and a few other firms have already been providing customers with automation, but it has been geared toward one stock technical analysis type trading. It has not been available relative to a strategy – across many stocks – in the way that Trade-Ideas is working on taking it to market.

So here we are in our labs working with a few direct access trading partners to bring the next generation of automated trading to life. Our customers will be able spend time after market working on the system and making sure the settings are right on their terms, taking their time creating. During market hours, the computers will be their workhorse and our customers will be able to put down the hammer and simply watch the fruit of their labor. More details will be explained at our 2nd Annual Customer Learning Curve Seminar at the San Diego Traders Expo