During our series on automated trading systems, we’ve compared and contrasted buying an off the shelf system with building and testing your own trading system. In this final part of the series, we’ll compare the experiences of two traders who chose different trading system paths.
John Bates, a full-time real estate broker for Coldwell Banker, didn’t trade well on his own. “The only time I really lose money is when I try trading on my own, that’s why I had to look to automated systems,” he says. He decided to use an automated trading system created by commodity trading advisor Joe Krutsinger.
The system he bought, Time Charger, is completely automated but can be coded to trade by any time interval — one-minute, five-minute, half-hour, one-hour, etc. You can optimize the system for certain time frames, like trading certain times of a day or trade only on certain days. “I am a full-time real estate broker and I can’t watch the system all day long — that’s one of the reasons I wanted an automated trading system,” Bates says.
He’s been trading since October 2006 and while he paid $3,500 for the system, he’s made $7,800 on a $50,000 account trading stocks during the first eight weeks, and has made more than $15,000 since he started.
Profits can range between $200 per day to $3,000 per day. “Even if I only make $200 a day, that’s $1,000 a week, which is $52,000 a year. That’s a good number,” Bates says, adding that he’s not greedy and once he makes $500 in one day he can confidently turn the system off for the day and be happy with the results.
Bates says Time Charger is versatile, and he also uses it to trade the Russell 2000, the E-mini S&P 400, crude oil and the British pound futures. Twenty percent of his account is allocated to trading futures and the rest is used for stocks.
The next trader, Trader B, as we’ll call him as he didn’t want to be identified, has built several of his own systems and trades one now based on breakouts as he’s found breakout systems work well in futures markets. Trader B is a full-time futures trader with a six figure account. Markets he focuses on in this short term trading system are currencies, bonds, softs and grains.
His program is systematic but unlike Bates’, it does not enter orders for him, because that is a very expensive option. He makes about two to eight trades a day.
The program generates signals when markets close based on end-of-day data and he sends those orders to his broker each night for the following day, which may or may not be executed the next day, depending on whether the market hits his price. “I’ll have [entry] orders above and below the market,” Trader B says.
Bates runs his program at different hours during different days. He says if a certain market is moving well, like crude oil, then he will leave the system running all day, but this is rare and he doesn’t recommend it.
“Sometimes I hear [the system] at three in the morning saying ‘order filled.’ I wake up thinking ‘what did it just buy?’ bates says. “One day I ran downstairs and saw it had gone long oil. I checked on it again after six in the morning and it was up $900 on one oil contract. I thought, ‘three hours, $900, and I didn’t do anything. I can turn it off now and I’m done for the day,’” he says.
Trader B does not have a required target for the day nor will he stop trading after making a certain amount. However, he does sets stops and does not move them.
“My normal routine is I get up in the morning and check all the settings in the system and make sure it’s up and running. The night before I look at any new stocks I want to trade and optimize those and set them up in the system,” Bates says. “Once the system is set, he checks on it two or three times during the day. If he is making money on a certain position he may turn off the automation, get out with a profit and call it a day. “One day I made $2,500 on a position and I turned it off. That was enough. But some days the markets have been struggling all day and you may be breaking even or $200 or $300 down and you turn it off and call it a day,” Bates says.
Trader B also allows himself discretion, but prefers not to because, like Bates, Trader B says he loses money when he deviates from the system. Bates and Trader B also agree that leaving a system running overnight is not a good idea. “It’s important to minimize risk,” Bates says.
Bates prefers the automated system because all his bases are covered. “With automated systems you can set stop losses, you can set percent trailing stop losses and [do] a lot of things I don’t fully understand. But even if you don’t understand how to do all this yourself, you can get an off-the-shelf system and it has stop losses programmed in, and you can change the parameters,” Bates says.
“I don’t understand the coding language, but I know my system has stops and I’m confident that if the trade goes bad, the system is going to take me out.”
An important point when it comes to system trading is how often to reoptimize. What Bates looks for when considering reoptimization is two or three days of no profits with the system. (Note: Over-optimization in building systems is generally dangerous and not recommended).
“You can optimize as often as you feel is necessary, but here’s what I do,” Bates says. “If the market is in a basic uptrend and not changing, you can stick with the same optimization parameters you have for a long time. Because if the market is trending, that’s when it’s best for an automated system to create signals and take trades,” he says. “When the market gets choppy you have to turn the system off and look for something less choppy to trade. When you do that you have to reoptimize the system.”
Bates notes with his automated system, he can optimize a system to markets and stocks to see on which the system performs better, but it takes deeper research to find markets or stocks that are more likely to yield profits during a certain period.
To qualify new markets, Bates is a member of an Investor Business Daily meet up group in Naperville, Ill., where members look at stocks on a regular basis to determine which ones have potential. He advises traders to join a user group or chat room of traders exchange or bounce trading ideas off of. Bates also looks at stocks during the weekend to see which stocks he may want to trade the following week.
Even with an system trading, every trader has his own trading style and whether you will trade a system full- or part-time, a look at how others have done it and their reasons why should help you decide what path to take in buying or building a trading system.