Why machines are our best friends.
What is the difference between an active or a systematic trading strategy? This question is probably enough for many of you to stop reading this post and doing something more productive this morning. However, please bear with me as it does raise an interesting point: when to put our money at risk, is not an easy decision. More often than not, it can become very emotional for those that have just put all that they know, and all that they have, into that particular trade or investment.
All the brain power, all the intricate analysis, and all the decision making to figure out at what price to get in, and then alea iacta est (the die have been cast). The market tells us very clearly whether we are right or wrong. The results are plain to see, the markets never lie, and then you have to do it again, and again, fretting each time when to get in and when to get out. It's akin to having a pop maths quiz every time you trade and the most frustrating thing of all is to be totally right, yet still lose money because we bought or sold at the wrong time.
Now imagine making this much easier and rather using a computer to do the dirty work for us. We can program a machine with instructions to buy and sell any financial instrument at specified prices. Maybe because we like the technical levels of the FTSE 100, maybe we have determined at what price the valuation of Vodafone is either expensive or cheap. The point is, when your decisions are based upon a consistent process and you would always make the same choice given the same information, then you can trade the strategy systematically.
You can even program a series of price patterns. For example, if Vodafone has gone down by more than 1% for 5 days, and then goes up by 2%, buy one unit. Clearly you have to still get more right than wrong, but the aim is to always make consistent decisions. That way, we can see what is working and we can adjust the parameters if it is not. Given all of this computing power at our disposal, it is no wonder that more than 60% of all globally traded volumes are now driven by machines.
It’s not so much that active traders are necessarily bad at what they do. Rather, it is in the way the machines make money that no human could ever compete. In the first instance, the computer is a watchdog. It is assigned to look for clearly defined things and trade at very precise levels. Moreover, it can look at thousands of different securities, patterns and spreads, across hundreds of different markets, for as long as we make money. And the computer never sleeps, never complains, and never does anything other than exactly what we tell it to do. Great. Everybody should have a computer.