Monday, April 12, 2010

Messing with an Expert Advisor... Five Reasons Why you Should NOT Intervene

One of the things I have found most common regarding new traders and the way in which they approach mechanical trading systems is that they are very likely to intervene with the trading of an expert advisor for a large variety of reasons. People justify intervention in many ways : "I knew the news would be positive/negative", "the market was too volatile", "I knew it would come back", etc. The truth my dear readers is that these are mere excuses which arise from insecurity and lack of confidence. There is no way in which someone can know beforehand how the market will behave and intervention is - truth be told - a non mechanical modification of a trading system's performance which may lead to very bad consequences in the long term.

Within this post I want to talk to all of you who like to "mess" with your automated trading systems to tell you the reasons why I know that intervention with an expert advisor is almost guaranteed to be detrimental in the long term (at least with long term profitable systems). After you read this post I want you to reflect upon your trading and address the issues you have regarding the systems you are currently using so that you can truly use them successfuly in the long run. So here are my top 5 reasons why you should NEVER meddle with your automated trading system.

1. If it isn't broken, don't fix it. This very simple saying applies to automated trading as it does to taking apart a perfectly good electronic device. If you have analyzed your trading system and you know it has adaptive capabilities and it can survive a different array of market conditions then why in the world are you intervening ? What you are doing is changing the overall performance of your system to something which is non-mechanical and not evaluated, you are in fact taking something good and making it something unrecognizable.

2. You cannot predict the future. If you think about it, you don't know where the market will be heading and you have less statistical justification to intervene than what your EA has to do whatever it is doing. If an EA has been profitable in months of live trading and 10 years of backtesting then it "knows" the market better than you do. Could you have taken successful trades for the past 10 years with an overall statistical advantage ? The expert advisor did and you are now trampling all over it like you have an edge it doesn't.

3. Your not thinking about the long term. The reasons you are modifying the trading system is because you fail to evaluate the big picture, you intervene on one or another trade merely because currently you are unable to handle a loss, you are desperate to capture some profit (you hate giving back), etc. You simply LACK confidence on what your mechanical system is trying to do and you are just damaging its mechanical edge by introducing "what you think is best" when actually what you are doing is taking an emotional non-mechanical decision which will be damaging to the system in the long term. This decision may seem rational to you but it is outside the mechanical rules and it should NOT be taken.

4. If improvements can be made, then code them. If you feel that there is something the EA is doing wrong then code the improvement in a mechanical fashion and see if it is translated into an overall improvement in profitability. You will find out that many of your "interventions" are detrimental in the long term. For example, some people are very uncomfortable when systems give back profit and they quickly jump to suggest a trailing stop. Then when the trailing stop is implemented you see that overall you take more profit but you miss some profitable runs which accounted for a good portion of the system's profitability. You need to have statistically powerful reasons to introduce modifications the "I feel like it", "I think" way of modifying trading does NOT work in the long term.

5. The market's alluring short term compensation. People usually justify intervention by saying "it has worked for me in the past" and the truth is that in a long term profitable system intervention may reward you a very substantial amount of the time. So you will be happy to intervene 75% of the time or even more. However, the truth is that sooner or later your meddling will have dire consequences for the strategy. You will someday intervene and forfeit a profitable trade which accounted for a large amount of the yearly gains, etc. I can guarantee that you will regret intervention in the long term.

Again, the truth is that intervention is nothing but the manifestation of the emotions that are generated when you lack confidence. If you trust a system and the way it handles the market then you simply let it do its thing. If you think it can be improved then you do a rigurous historical and statistical analysis of hundreds of trades and introduce modifications within the code. By intervening with an expert advisor you are simply destroying its trading tactic and making it be something different which is non-mechanical and has uncertain results in the long term, taking away all the validity of simulations, previous live trading, etc.

My advice is then pretty simple, analyse a few hundred trades, analyze the logic, know when the system is bound to lose trades, when it wins, how it wins, how it loses and learn to be comfortable with the historically seen periods of loses and profits. Most people are simply lazy and don't want to do this and they pay for this laziness with an overall lack of confidence, uncertainty and by intervening with systems and changing their long term behavior and profitability. It is difficult not to intervene and it takes years of practice and experience to be able to restrain one's self, for some people these words will be enough, for others it will take the messing up of a strategy and the arrival at an unprofitable scenario to learn the lesson.

If you would like to learn more about what I have learned regarding automated trading and how you too can educate yourselves to achieve a higher like hood of long term profitability please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !

1 comment:

Gabor said...

It's worth reading Curtis Faith's book about Richard Denis and his turtle traders. One of the lessons is that those turtles were successful who followed the Turtle system rules (which is a pure mechanical system) to the letter. He deals a lot of the psychological aspects of mechanical trading and I have to say that today we have to overcome the same difficulties than the turtles had to at their time. At least we have programmable trading platforms :)

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