My Journey to Fully Automate My Trading: The Extreme Volatility Challenge is Blessing in Disguise

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It is the end of second quarter of year 2020, I am so busy with so many things I could not really sit down to write something for this series for months. Since this series is a documentary, I guess I should write something so that looking back, I have what happened on record. After contemplating on several ideas, I decided to talk about the impact of extreme volatility on my trading strategies.

There it was, March 2020, the fastest and steepest decline in S&P500 in its history. And then even more amazing, was the miracle rally from that swing low pushing S&P500 back up to almost unchanged for the year. Nasdaq 100 has even made new all time high now.

So many of you have asked whether my trading models are doing fine? I can detect the undertone even though English is not my native language. My guess is that they are wondering if I lost a lot of money during this time.

In short, I am doing fine. If I were trading mostly discretionarily, I will not be. The automated trading strategies saved me from making major trading mistakes many times during this period. I am so glad that I managed to convert about 50% of my trading method to fully mechanical trading models right before the start the extreme trading environment.

What Went Right

The strategies managed to avoid most of the trading days that has extreme swings. Some of you may wonder why avoiding those days. Isn’t it the purpose of day trading to capture the intraday movements?

Yes, day trading strategies are designed to capture the intraday price movements based on the microstructure for which price would move a certain way given certain pre-conditions are met. However, when the volatility is way too high, even if you are on the right side of a move, the strategy will still be stopped out easily thanks to the extreme swings every few minutes.

Of course you can increase the size of the stop losses to participate in the game. But my research shows that is absolutely counter-productive. First, increasing the overall risk taken per contract means you need to reduce the total size of each trade to protect the trading capital from an overall risk management perspective. Second, the equity swings can be nerve wrecking which can disable you from take care of your everyday tasks. In other words, you see extreme swings in your equity and likely ended up doing almost nothing.

One very good thing that stands out is the data and order server stability with all these firms I work with. Comparing to the financial crisis back in year 2008 and 2009, the experience is so much better. Back then we have so many outages making trading nearly impossible. Just the fear of being trapped in an open position was bad enough. Again, the advancement and maturity in technology and infrastructure with these firms are something I greatly appreciated.

What Went Wrong

I was caught off-guard several times when the brokerages made sudden announcement to change the margin requirements. There was once that the change was made in the middle of a trading session. These sudden changes caused me to miss several trades due to the orders being rejected by the brokerage system.

Not happy with these incidents mainly because the missed trades are all winners. LOL

And I learned from this experience that the brokerages are reacting to the situation very differently. For example, Interactive Brokers and Tradestation at times raising their day trading margin requirement to full exchange overnight maintenance margin while some pro shops just double up their promised day trading margin requirement. What the brokerage firms do is not to protect their clients. What they are doing is protecting themselves. This shows that the pro firms understand their clients are professionals so there is no need to exercise extreme caution.

The worst part of the experience so far is the next to none support from many firms as the lock-down due to COVID19 forced many to operate remotely with very limited access to their staff. So anything that requires human intervention or help becomes not available or that the waiting queue is so long that you just have to give up. Can’t complain about that since this will probably become the new normal if the outbreak continues for a prolonged period of time.

What Could Be Improved

Technically, highest priority is the integration of position size into some of my trading strategies so that they can change the order size should there be a sudden margin change. This is not difficult but takes time to develop and test the code. Just one more project on the table that jumped my long queue of other things I need to get done.

I already have remote control of everything setup so that is not a problem. The remaining disaster scenario is that we have some form of global internet outage while I have an open position. For this scenario, I am still working on a way to minimize its impact.

What’s Next

The time I saved from manual trading gave me the freedom over the past few months in completing a few business deals. The main benefit, however, is that I have more time to spend on automating even more of my trading strategies. It is just fun watching these bots going live and doing their things.

It feels like playing Legos when I was very young or playing SimCity as a teenager. The satisfaction coming from the accomplishment is very hard to describe.

As I mentioned in my weekly blog, the success I have achieved so far with the conversion process has given me the confidence to keep going until everything is automated. One fund manager who is a long time friend sum it up nicely – once you have converted to automated trading, you will never go back.

My Journey to Fully Automate My Trading: The Commitment

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I talked about fully automating my trading for many years yet I could not stop myself from staying in front of the screen most of the time. This year, my new year resolution is to commit to the process of converting whatever I am doing in trading to a fully automated process. I know it is going to be a challenge for a discretionary trader who has been trading for better half of my life. I also know that the process itself can be a very rewarding experience. After all, I have not taken on a challenge this big for a long time.

A Bit About Myself and My Trading

In case you are not my long term readers or members of my website daytradingbias.com, it can be very confusing of what I am talking about. Here is a proper introduction of myself.

I have been trading for more than two decades (getting close to three now) professionally. I started out trading as a floor trader in a stock exchange trading stocks and stock options. I moved on to trading commodities and index futures. I manage other people’s money and also act as advisor to very affluent families on their high-risk portion of their funds. There were good times and bad times with my trading over my long trading career. Overall I manage to do pretty well and it has been a life enriching experience.

Over the years, my trading style has changed a lot. Although I started out trading 100% discretionarily, my current trading is a mix of mechanical trading on certain markets while engaging the other markets I have very specific routines and rules I follow strictly. Hence I am no newbie in mechanical trading. I just do not want to automate my main markets, the index futures, probably because of psychological reasons.

What Pushed Me to Take on this Challenge

I have a tough ride in my personal life over the past few years. Time became a very precious resource as I have to strike a balance between taking care of my loved one and my professional obligations of managing my clients’ money. During that time, I researched and refined my trading style so that it is more streamline and robust such that my emotion component would play a much lesser row in affecting my performance.

It turns out, my effort in reducing my time in front of the screen did not reduce my trading performance. It actually improved my trading performance significantly. I would not say the outcome is a result of those clichés like “less is more” bullshit. I think it was the process of objective reflection and evaluation of what I did that gave me clarity in reducing the clutters in both the actual rules of engagement in my trading plan and the beliefs I held for years about the markets which I never questioned until then.

So here I am, equipped with everything I have got, including time to spare at this point. I have no excuse not to complete the journey. The experience and knowledge gained from the process alone worth giving this a shot with everything I got. If the goal of fully automating my trading is partially successful, I gain even more time to take on even more important tasks in the future. There is really no downside to this challenge.

In other words, I have no excuse not to make it happen, now.

What’s Next

There are many things to get done in preparation phase for this project. It takes time to get these tasks completed before I can move onto the next phase of the project. Since I am not in a rush to make this happens overnight, I will take my time to complete these tasks carefully.

Throughout this project, I will document what I do so that all of you will learn something about the process of converting a discretionary trading method into fully automated trading. I am documenting my journey also for the purpose of holding myself accountable. This is my way to push myself to commit to the project no matter what the outcome is.

Life is worth living if it is a meaningful one. Finding new challenges to overcome is one way to make life more fulfilling. I find a serious challenge this time and I am very excited.