MIND VS MACHINE : HOW EMOTIONLESS IS ALGORITHMIC TRADING? EXPLORING ITS ABILITY TO AVOID EMOTIONAL BIASES
As someone who has made the transition from discretionary to algorithmic trading, I've come to appreciate the significant impact of emotions on trading outcomes. The statistics are alarming - 90% of traders lose 90% of their capital within the first 90 days of trading. It's no wonder that many traders are turning to algorithmic trading, which involves executing trades based on pre-set rules that are triggered when specific conditions are met. But the question remains - can algorithmic trading truly eliminate emotions?
While algorithmic trading is designed to be emotionless, it's not entirely immune to impulsive decisions or manual intervention. The system is only as good as the rules that govern it, and it's up to the trader to ensure that they are adhered to. One incident that comes to mind is when I was trading @ES.D with my Long execution-only strategy. The trade opened on a Friday after a two-day gap-up that I knew was statistically filled. Despite my rule of just watching from the sidelines as a spectator, I started to compromise my system and overthink things.
I received a signal to enter the trade with an exit set for the end of the day, but I didn't want to follow it. Instead, I became a human filter and evaluated the idea myself, opening and closing the trade prematurely. As a result, I left significant profits on the table. This experience served as a reminder of the importance of avoiding interference with algorithms. Trades are pre-adjusted through rigorous testing, including pre-validation, validation, and stress testing. It's crucial to let the mathematical and statistical edge of the algorithm work its magic, and to analyze and evaluate trades regularly rather than focusing on individual outcomes.
Regardless of whether a trade results in a win, loss, or break-even, it's not the individual trade that makes or breaks a strategy. Instead, traders should focus on analyzing and evaluating their trades every 10/25/50 trades to allow their mathematical and statistical edge to work its magic. This practice helps to ensure that the strategy remains effective over the long run.
In conclusion, while algorithmic trading is designed to eliminate emotions, it's not entirely immune to impulsive decisions or manual intervention. Traders must ensure that they adhere to the rules that govern their algorithmic trading system to avoid compromising the effectiveness of the strategy. By doing so, traders can leverage the mathematical and statistical edge of their algorithms to achieve success in the market.