SCOTT WELSH TRADING BLOG

A Blessing and a Curse (Step 15)

A Blessing and a Curse (Step 15)

July 29, 2020

We recently decided to embark on a journey to beat the market.

To do that, we decided to start from scratch. 

Our goal is to build a system that will easily outperform the market over time and build this system step-by-step so anyone can follow along. Feel free to ask questions as we go. 

To review, here’s what we’ve done so far:

  1. We chose Forex over stocks and futures for the leverage and because we can trade any size account;
  2. We picked a system that suits our psyche (buy-low-sell-high) so we wouldn’t get discouraged, and then did a quick run-through of some numbers to see if it’s profitable;
  3. We chose one of the most popular currency pairs (EURUSD);
  4. We used ATR to build a hypothesis on how our system could work;
  5. We calculated a legitimate trade size we could use.
  6. We looked at what max drawdown means and how to manage it cautiously.
  7. We looked at how to not be so careful and manage max drawdown aggressively.
  8. Then we did a quick checkup to see if our system is beating the market. (It did by a nice margin.)
  9. We investigated moving to break-even.
  10. We examined if certain trading days are better than others.
  11. We stressed the importance of quality data.
  12. We discussed the logistics of timeframe.
  13. We looked at compounding our gains.
  14. We examined the inherent problems with any system.

Our system from scratch seems finished.

But there are a few more logistical problems to address.

A big problem is the actual trading of the system. If we can’t take the trades, there are no profits no matter how good the system is.

What’s the easiest solution to this? Put a robot on it.

I first became aware of trading with robots back in 2012. I was so excited about the possibility of having a robot take all my trades that I have been trading and developing robots ever since.

It’s the perfect way to trade.

One, a robot always follows the system. No sick days or depressed days or off days.

Two, a robot is disciplined. Humans are not.

Three, a robot can trade when you’re on vacation. What’s better than that?

Four, a robot offers perfect backtesting. Manual testing will never be as accurate as automated testing.

So, what’s the problem?

The problem is the solution.

Sometimes a human is right not to follow the system. Not following sometimes makes more money.

Sometimes being undisciplined opens up new opportunities.

Sometimes trades taken on vacations are losers.

And automated backtesting, if done poorly (as we saw in Step 11), can lead to terrible real-world results.

But that’s not the worst part.

Trading a robot can be scary.

Do you know why people are afraid to fly? It’s because they have no control.

Guess what happens with robot trading? The trader has no control.

The fear of flying is real and debilitating. Trading a robot can create similar emotions.

Last, trading someone else’s robot is often not a successful endeavor. Why? Because it’s someone else’s system. If we don’t make it our own, we’ll dump it after the first losing streak.

At first, robot trading seems like the best thing in the world. It can literally make money while you sleep.

But there are major problems with having a robot trade for you.

However, those problems can be overcome.

If we completely understand a robot — if we build one from scratch, for example  — then it becomes ours and has a chance to be successful.

And when we understand a system, we don’t get nervous if a robot trades it for us. We’re grateful for it.

We would just have to be willing to not take discretionary shortcuts. We have to be willing to stay out of it.

If we can do that, robot trading becomes a blessing.

And not a curse.

 

In our next email, we’ll look at adding to our system from scratch. Is diversification really a good idea?

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Talk to you soon.

 

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Disclaimer:
It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples presented on these sites are for educational purposes only. These set-ups are not solicitations of any order to buy or sell. The authors, the publisher, and all affiliates assume no responsibility for your trading results. There is a high degree of risk in trading.

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.