The Online Investing AI Blog

Whether you’re trading your own strategies, or using an Automated Trading system to enter and exit positions, backtesting is the proof-du-jour of due diligence.

The rationale is, if you take the strategy and allow it to trade through historical data, the strategy should achieve similar results in real world trading. But there are a few reasons why backtesting can fail despite the best backtested results.

There are a few names for the first type of backtesting failure that we’ll look at, but it’s often referred to as data-snooping.

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Picture credit: ellievanhoutte @ Flickr

Depending on which researchers you talk to, about half to two-thirds of all Americans aren’t saving enough for retirement.

There’s a variety of reasons for not saving for retirement. You might think you don’t have the spare money. You might think that saving money for retirement can be started “later.” Or, you’re one of those James-Dean-live-fast-die-young type of people who figure they won’t be around long enough to enjoy the delayed fruits of their labors.

Worse, some people might think they can rely on Social Ponzicurity to take care of them in their golden age.

The truth is, a lot of factors can affect your retirement. So, if you’ve calculated your retirement savings, or you’re going to–you might want to consider the following six factors that can influence your retirement:

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Automated Trading systems have a future in finance and we believe it’s a big future.

It’s already well underway. Automated Trading systems are managing billions of dollars worth of assets and making billions of dollars worth of trades for large financial concerns and hedge funds.

Eventually, these advanced trading systems will work their way into the hands of more individual traders and investors.

One major hurdle remains: companies can spend big bucks testing their systems. We have to trust the developers and, frankly, there are a lot of Automated Trading charlatans in the business.

To minimize the likelihood that you’re not being hosed by an scam artist posing as an Automated Trading developer, here are some due diligence tips.

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Well, maybe meaningless is too strong of a word. But, technically when you’re shopping for Automated Trading systems, the percent of winning trades may not accurately assess the success of the system.

Depending on how you define success, a team with the most hits is not the most successful. It’s the team with the most runs.

A guest poster at the INO Blog indicates that many traders focus on winning percentages when they investigate Automated Trading systems. The logic behind this seems solid: the more times you win, the more you win.

Trading, though, often has its own rules of logic.

How can you win 90 percent of the time and lose money?

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Many people are excited about the prospects of Automated Trading systems. These computer programs automatically buy and sell stocks, options, currencies and other liquid assets like a human trader. The big improvement is that they can consistently generate positive returns without the emotional reactions of human traders.

There are many different strategies to developing Automated Trading systems. Some people try to encode the strategies of successful traders into a computer program. Although this approach is perfectly viable, we believe there is a better way. What if it were possible to develop Artificial Intelligence that could generate it’s own trading systems. Would it be possible to create systems that work better than those designed by humans?

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One of the most common things I hear from financial planners is, “If you want to increase your returns, you have to increase the risk.” This is part of the stock and bond mutual fund philosophy of investing promoted by most financial planners. They say that if you want higher returns, you have to invest in stock mutual funds. And those are risky because the stock market goes up and down. That’s probably true for people who own mutual funds today.

I don’t know if this risk vs. reward idea is really correct. Consider someone driving a car. Saying higher returns requires more risk is like saying driving faster is riskier. Yes, driving faster is riskier, but only if nothing else changes. What if the skill of the driver improves? Which of the following would you say is riskier? An experienced race car driver, driving 90 miles an hour or a beginner driver driving at 50 miles per hour?

I think that more risk is required to get higher returns only if the skill of the investor is constant. If one investor has more skills than the other, then they may be able to invest with less risk and higher returns than someone who has less skills. It’s the same story as an expert race car driver compared to a new driver with a learner’s permit.

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Automated Trading Systems use computer technology to find and make trades. The systems are further enhanced because they can send these trading signals to the brokerage account of a virtually unlimited number of clients or subscribers to make the same trades.

The advantages for an independent investor or trader are numerous. The primary one is that Automated Trading systems require little maintenance. The trader subscribes and then checks a few times to make sure the trading system is performing up to expectations. If it isn’t, the trader can simply unsubscribe and choose another system, or wait for the performance to be restored.

There are ways that a trader can optimize his or her returns:

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While everyone can be a candidate for Automated Trading, some traders make better candidates than others.

Automated Trading is simply a way for a trader to securely trade your account for you.

If you’re interested in Automated Trading, or are new to the concept, you can use the following criteria to determine whether this trading technology makes sense for you.

You have risk tolerance. Automated Trading has its risks, too, so don’t bet the milk money, or Lactaid money for those who have a high risk tolerance but low lactose intolerance.

You have about $5,000. Most Automated Trading systems require more frequent trading. If you don’t have a sizable portion of money, your return will be eaten away by commissions.

You don’t want to spend all day watching the market. Automated Trading is like letting someone else monitor the market for you.

You don’t want to spend all night researching. Trading stocks can require a lot of study and research time, depending on how you trade. Automated Trading does all this, especially systems that use technology to study positions.

You want to hedge your own trading moves. Some folks just like to trade. There’s nothing wrong with that. But, there are traders who choose an Automated Trading system–or systems–to trade a portion of their account. It acts as a hedge and improves the odds of success for their total return.

You want to make better than average returns. If you choose correctly, Automated Trading systems can unlock the same type of high returns without the massive time of work and research that most traders put in to examine their positions.

If you can agree with these six principles, chances are Automated Trading is a good fit.

To learn more, check out Online Trading AI.

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One reason we favor autotrading–or automated trading–systems, such as ones found at Collective 2 and Strategy Exchange, is because these systems reflect a passive investment system that doesn’t include outrageous fees, like mutual fund advisers and financial managers call.

In other words, the returns are not drained by needless fees and this adds to your ability to compound investments.

However, like any investment management system, there are risks with autotrading. There are autotrading systems that lose money and even ones that are operated by fraudulent developers.

Here are five criteria to keep in mind when you’re measuring the success of autotrading systems:

Rate of Return or Profit/Loss

This predicts the percentage of return on a system. Usually the higher the return, the better, but there are some cautions. A high, but temporary, upturn can make the rate of return extremely high. Instead, you should factor in systems that have a long-term, predictable high return. To determine that, check the length of time the system has been trading.

Length of time the systems have been trading

To verify the system has been delivering long-term gains, check to see how long the system has been trading. A system that has a high return, but has been only in operation a few weeks may raise a red flag.

Drawdown

The drawdown shows losing sessions, sessions that could wipe out your trade. Avoid systems with excessive drawdowns.

Win/loss ratio

Many people believe the win-loss ratio indicates system success. It can; but trading is strange. For instance, you could have 99 winning trades, but one massive losing trade and the system could produce negative results. Likewise, a system could technically have 99 losing positions and score with one big trade to lead it into profitable status.

Asset Mix

The success of a system could be determined by what it trades. If an autotrading system is trading oil long in a very bullish oil market, chances are the success of the system can be attributed less to the trader than to the asset itself; and when the oil market changes, so could your returns.

Online Investing AI is creating autotrading systems that seek to optimize these criteria by using advanced, artificial intelligence technology. This technology seeks to optimize predictability by avoiding human emotions–such as fear and greed–that can produce unbalanced and unwise trading positions.

These systems are designed for consistently good returns at low risk and drawdawn levels.

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The exponential gains in technology are indisputable, but the journey has its bumps and dips.

Financially, we’re undergoing some insane, never-seen-or-felt-before dips and lifts in the stock market. The effects of which are being felt globally. What started out as high house prices in the west and southwest have reverberated across the country, over Europe and into Asia.

Gas prices soared. Then they crashed.

In movements that took only months, various stock markets have returned to levels they haven’t seen since 1997, discounting all measures of productivity gains and increased computing power.

The critics of the Singularity say that limits have been reached. Technology can only help so much. And, prosperity will now level off, or decrease.

I believe that people are drawing the wrong conclusion from the right evidence. Advanced technology does not decrease volatility; nor, does it decrease human emotions, like euphoria… or panic. The technology that’s responsible for some amazing gains in computing power, productivity increase, and global interaction can be just as easily be used to spread panic in the financial system around the world.

From epoch to epoch, uncertainty and panic tend to grow. New worlds and new dimensions are not easy births.

As counterintuitive as it may seem, could the extreme volatility in real estate markets in the United States, the wage decreases in Russia, the closed factories in China, and empty oil fields in the Middle East, be signs that the world is on track for the Singularity?

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