Automated Trading and Risk Management
To make money in they markets, do you have to accurately predict which way the market is going to go?
Most people would answer yes, but in fact the answer is no. You do not need to consistently predict which way it goes to make money.
How is this possible? It’s possible because the factors that lead to financial success through trading are well known and largely ignored. These factors are:
- A system with written rules
- Risk management
- Proper position sizing
Since Automated Trading is done through rules, the first requirement is met. What about risk management?
That is where many Automated Trading systems fall short. Since these systems are backtested in development, risk management is not an issue. During their creation, they successfully make money trading. Therefore there is no issue of successful strategies going bankrupt during development. However, as soon as they are used in live trading the story changes. Usually these systems lose all the money in the account after a fairly short time.
Why? Because the system developers never bothered to manage risk. Sooner or later (and usually it’s sooner), the system will fail because of high risk.
Our approach is to create systems that have low risk and will perform consistently over a long period of time. No trading system is perfect, but we believe that we can use advanced artificial intelligence technology to develop systems with low risk.
How do you tell if a system is high risk? Easy. Ask the developer how they manage risk. If they don’t have a simple answer that explains how they manage risk during system development that you can understand, then they probably just treated risk as an annoying detail and ignored it.
Automated Trading is a new and powerful tool to achieve financial success. And, there are certain issues that we need to be aware of when using these systems. Perhaps one of the most important of these issues is risk management.
is one of my favorite financial books of all time. It's an allegory about a guy who has a terrible job, and how he overcomes challenges to achieve his dreams.
