Algorithmic Trading & the replacement of conventional capital market traders
Conventional trading is dead. The market is run by advanced systems that capitalize off market sentiment, manual processes and inefficient execution. My first exposure to algorithmic trading was in 2013 when I was involved with a New Zealand Financial Services Provider. Capital market controls were easier back in New Zealand during those times. What I witnessed, learned and practiced astounded me.
Suitability dictates high frequency, decision based logic and mathematical targets (think Fibonacci Ratios) be marketed only to high end sophisticated person(s). Our target was liquid net worth people in excess of 1mm NZD equivalent. These individuals typically organized as institutions (small capitalized banks), family offices and high net worth individuals — which qualified as Qualified Intuitional Buyers (or QIB).
Our frame works consisted of designing targets that took small frequent trades with low targets to achieve profit factors at least three to one (3:1). We aimed for accuracy that would be at least sixty percent (60%) accurate. At a profit factor of 3.0 or greater, with incentives called “rebates”, we were able to remain profitable. The strategy was applied to one hour to fifteen minute charts. The volatility in these charts is high. The average true range (ATR) can swing wildly depending on market sentiment. The risk is high. The returns are high too. Blocks only worked if the strategy could be limited in leverage (usually 1:1 or 1:1.5) and fulfilled a full block (at least a lot size of $150,000).
While the strategy is scalable it is important to note it’s not for the everyday person with $10,000 to burn. The wipe out occurs with accounts that try to manage a lot size at 15:1 leverage. These leveraged accounts can’t tolerate a 5% shift in normal movement (at 15:1 that’s 75% of your $10,000 account). That’s why institutional traders make money consistently and retail traders lose consistently.
Leverage in trading is a trap that pays like casinos (spotty odds with one big win every year to keep faith in a broken system going).
Combine leverage with manual processes and the retail person can’t compete. It’s a losing battle before your session even starts.
A good portion of conventional traders rack nerves, burn out, and emotionally panic. Human sentiment creates the wild swings. Algorithmic trading analyzes sentiment dynamic to identify patterns. Patterns create trends. Trends are basis for swing trading. Computers have no emotion. The quick execution of these opportunities, with firm target factors, creates superior performance. It was during this time I learned how plus five percent (5%) monthly returns not only happened but occurred frequently. Combined with compounding this can amount to astronomical numbers.
To be clear this strategy is not for feint at heart. You must be comfortable with draw downs that can amount to as much as 15% in a month. Most do not have the stomach for this. Therefore it is not advisable you enter this strategy if you can’t take it. Two negative months in a row can result in a third of your account being drawn down. Then a big swing in month three recovers most loses. Then the account runs in the red for one more month before finally getting up 20% year to date (in a five month span). If you approach algorithmic trading, balancing realistic expectations with systematic compartmentalization, you will be successful.
Algorithms work to have the edge over normal market sentiment. Just don’t get in a high stakes game without the chips to play. Going all in every hand in poker at a big stake table is not a strategy its blind faith. The same applies to trading in today’s environment.
About Christopher: Christopher Knight Lopez is a Professional Entrepreneur. Christopher has opened over 7 businesses in his 14-year career. Christopher’s purpose is to take advantage of various market-driven opportunities. Christopher is a certified Master Project Manager (MPM) and Accredited Financial Analyst (AFA). Christopher previously held his Series 65 securities license. Christopher also has his General Lines — Life, Accident, Health & HMO. Christopher has managed a combined 286mm USD in reported Assets Under Management & Assets Under Advisement. Christopher has work experience in 29 countries, raised over 50mm USD for various businesses, and grossed over 7.5mm in his personal career. Christopher worked in the highly technical industries of: biotechnology, finance, securities, manufacturing, real estate, and residential mortgages. Christopher is a United States Air Force Veteran. Christopher has a passion for family, competitive sports, fishing, martial arts and advocacy for entrepreneurs. Christopher provides self-help classes for up-and-coming entrepreneurs. Christopher’s passion to mentor comes from belief that entrepreneurs need guidance. The world is full of conflicting information about entrepreneur identity. See more at www.christopherklopez.com.