Beat the Market with Algo Trading - 100% Automated
STATISTICS
- Algorithmic trading contributed nearly 60-73% of all U.S. equity trading in 2018
- Leading 12 investment banks earned about $2 billion from the portfolio and algorithmic trading in 2020, according to Coalition Greenwich.
- In Europe and the US, 10% of the hedge funds used algos to trade over 80% of their value in 2020
ALGO TRADING IS (GOING TO BE) THE NEW NORM
If you think algo trading is far away in the future think again.
Just like crypto is here to stay, algorithms and AI are the new norm or going to be very soon. The numbers are speaking loud and clear.
For those of you who know me for some time, it is clear that I’ve dedicated a lot of energy and time in the past few years pursuing the idea of algorithmic trading.
It is a totally different world with new challenges to tackle but on the other hand it is absolutely amazing.
One thing that became evident to me is that you MUST follow the big guys, “smart money” in order to make money!
Just like in manual trading, there are specific giveaways and methods to see where the big guys are involved. That being said, if banks and hedge funds are going for algo trading and moving towards automating, don’t you think it is time to consider this as an option as well?
Naturally, the average retail trader doesn’t have the same resources, tools, infrastructure and man power to achieve the same results as “them”. BUT just like in manual trading, if you know where to look and what to look for, you may gain enough edge to make money.
Enough introductions. Let’s take a look at what I have to share in this article.
PLATFORM X – 100% AUTOMATED MODULE IS NOW HERE!
The idea or should I say necessity of Platform X arose few years back when I wanted to create some kind of multi time frame scanner that will give me an output and summary for a given market. Should I be looking for buys/sells, should I be ignoring this market for now (neutral)? How about volatility? These and many more features which you can check out on the website www.spotlight.traders-terminal.com
THE AUTOMATED MODULE (PLX AUTO)
The robustness of the core algorithm proved itself and the next step was only logical – 100% automation. After all, the hardest part was already done: which way to trade and should I trade at all? All that is left at this stage is to find a reasonable entry strategy. So I started working in this direction. Below you will find everything I was able to achieve in the recent months. At this point i’m confident enough in the model to start live trading thus making it publicly available.
Below are some of the key features of Platform X Automated Module.
KEY CHARACTERISTICS
- Fully Automated
- Based on the core algo of Platform X
- Internal diversification
- Available for MT4 & MT5 platforms
- Swing & shorter term trading
- Min recommended trading period – 6-12 months.
PARAMETERS OF THE MODEL
- Starting balance of $5000
- Leverage 1:100
| 2016.10.01 - 2022.02.25 | PLX Auto |
|---|---|
| Return | 328.56% |
| Max Equity Drawdown | 10.37% |
| Return/DD Ratio | 31.5 |
| Sharpe Ratio | 1.99 |
| CAGR | 25.5% |
| Profit Factor | 2.15 |
| Trades | 413 |
BENCHMARK COMPARISON – SP500 vs Platform X Auto Module
Below is a comparison between the SP500 and PLX Auto using the standard settings for the model.
| 2017.01.01 - 2022.02.28 | SP500 | Platform X Aut Module |
|---|---|---|
| Return | 102.44% | 290.31% |
| Max Equity Drawdown | 33.7% | 10.5% |
| Return/DD Ratio | 3 | 27.6 |
| Sharpe Ratio | 1.25 | 1.99 |
The model performs quite well during the violent crash in 2020. Being able to trade the down side is beneficial in bear markets. This is the main reason the model sustains relatively low drawdown, which is the #1 goal – keep risk under control. The returns are close to 3 times higher than buy and hold. This of course comes with a price tag – leverage.
In Sample – Out Of Sample
If you are familiar with algorithmic trading, you probably heard about “Out Of Sample” and “In Sample”. In short, you are going to split your historical data into two or more parts. You will train and optimize the model on one part of the historical data. This is called In Sample.
On the other hand you want to see how the algo performs on data that it has never seen before. In a way simulating live trading. This is called Out Of Sample data.
Overall the model remains positive without any significant deviations for the drawdown.
OUT OF SAMPLE STATS
Even though we risk to fall into the “butterfly effect” here as the OOS period is limited, let’s take a look at how the model compares to its benchmark. The period examined is 2020.09.01 – 2022.02.28. Going beyond the peak of December 2021 in order to test the performance during the current dip.
| 2020.09.01 - 2022.02.28 | SP500 | Platform X Aut Module |
|---|---|---|
| Return | 28.61% | 42.46% |
| Max Equity Drawdown | 14.8% | 10.9% |
| Return/DD Ratio | 1.93 | 3.89 |
| Sharpe Ratio | 1.93 | 1.55 |
Calculating SP500’s sharpe ratio for this specific period is somewhat beneficial as the large drawdown of 2020 is not taken into consideration. However the most recent dip of over 14 percent (since the beginning of 2022), lowered the overall reading for 1.93.
PS – The “Return/DD Ratio” of 1.93 and Sharpe Ratio of 1.93 is not a typo.
For Platform X, things also look well compared to the stats of In Sample + Out Of Sample.
The max equity drawdown barely changed (0.4% increase) which is great. Sharpe ratio dropped by 0.44.
Overall the PLX Auto model beats the market in these 17 months.
LIVE PERFORMANCE
MINIMUM DEPOSIT REQUIRED
I ran multiple tests using different starting capital. Below I summed up the results for two periods 2017- 2022.02.28 and 2020.10.01 – 2022.02.28.
Lowering the capital pushes the model into higher drawdown and overall worse profit factor and sharpe ratio. The return on the other hand is surging quite a lot.
| STARTING CAPITAL: $500 | 2017.01.01 - 2022.02.28 | 2020.10.01 - 2022.02.28 |
|---|---|---|
| Return | 475% | 43.6% |
| Max Equity Drawdown | 12.6% | 23.5% |
| Profit Factor | 2.15 | 1.53 |
| Sharpe Ratio | 2.05 | 1.03 |
| STARTING CAPITAL: $1000 | 2017.01.01 - 2022.02.28 | 2020.10.01 - 2022.02.28 |
|---|---|---|
| Return | 370.50% | 46.10% |
| Max Equity Drawdown | 12.13% | 14.66% |
| Profit Factor | 2.13 | 1.65 |
| Sharpe Ratio | 2.00 | 1.37 |
| STARTING CAPITAL: $2500 | 2017.01.01 - 2022.02.28 | 2020.10.01 - 2022.02.28 |
|---|---|---|
| Return | 328.96% | 42.16% |
| Max Equity Drawdown | 10.7% | 12.8% |
| Profit Factor | 2.14 | 1.71 |
| Sharpe Ratio | 2.01 | 1.47 |
“OUT OF CONTEXT” EFFECT
When analyzing longer periods of time, the performance/equity curve smoothens out.
Graph below shows the SP500 performance from Feb 1982 Feb 23rd 2022. Even though there were a few major drawdowns, in general it performs quite well with a nice sloping up curve.
What most investors and swing traders don’t realize is that once you zoom into this graph, the stagnation and drawdown periods could be worth weeks, months or even years.
The most recent big correction ini 2020 was one of the fastest ones we have ever seen. The marked dipped for about a month and managed to form a new high in about 6 months (since the last peak at the end of February 2020).
In fact, if we take a look at the following table (source AndCo Consulting), “Recovery Trading Days” column, we can see the recovery period in days for every market correction that exceeded 5% since 1990.
Where i’m going with this? Even though the Equity chart looks pretty decent, when we “zoom in” we will find drawdown and stagnation periods.
Being prepared for such periods psychologically and emotionally will play a crucial role in your algo trading journey.
THINGS TO CONSIDER BEFORE USING ANY ALGO
There are no catches. There are however things to consider and be realistic in your expectations.
CONSIDERATION #1 – THE BUTTEFRLY EFFECT
The butterfly effect is not really a “catch” but something to consider and be prepared to deal with. The butterfly effect in trading deals with the phenomenon of varying results depending on where the model starts.
For example the results (Profit Factor, Sharpe Ratio, Drawdown, Gain etc) will differ if the model starts trading on January 1st 2020 and February 1st 2020. That makes a lot of sense when you think about it.
Consider the following example. There are 3 entries, approximately 12-13 days apart.
Entry #1 @ 3387, February 19th 2020.
Entry #1 @ 2786, March 9th 2020.
Entry #3 @ 2452, March 24th 2020.
Target/Exit at 3579 few months later.
Results:
Entry #1: 5.6%
Entry #2: 28.4%
Entry #3: 45.9%
This is oversimplified example with a single trade in an extreme market condition but I hope the point is clear.
In reality we can expect the model to underperform and outperform in different periods. This is why it is important to stick with it for long enough in order for the equity curve to smooth out and for the model to show its capabilities.
CONSIDERATION #2 – REALISTIC EXPACTATIONS
It is reasonable to expect the live performance to underperform the modeled performance. At least i do. I always look at the numbers and add 10-20% deviation to the negative side.
To illustrate with numbers:
- Model shows gains of 10% for the period
- I would consider 8% (20% less).
Models and back-tests are not perfect. They don’t account for many things like extra trading costs that were not included in the back-test, missed trades (your VPS crashed), software bugs, human mistakes and life basically. Shit happens. Account for it in advance and don’t be surprised later.
There are multiple issues related to algorithmic trading, for which I accounted for when developing this one, however until the model runs for over 1 year (at least, ideal period is 3 years) you should take all the numbers with a grain of salt.
If you are going to join me on this journey, my advice for you is to start really really small.
FAQ – BROKER, LEVERAGE, MINIMUM DEPOSIT
As Platform X user you get access to PLX Auto Module. This way you can still trade manually with your favorite strategy while enjoying the automated features of PLX Auto. Below are the most important factors concerning the software.
Leverage.
There aren’t many regulated brokers out there which still provide higher leverage to retail traders without some special conditions. There is a work around though.
One solution is to sign up with a broker that has jurisdictions in different locations. In the case of Admiral Markets you can register and get verified however, you may choose to use the Jordanian jurisdiction which allows you to trade with max of 1:500.
Minimum balance required.
As shown in the tests above the model starts to deviate at around $500 (leverage 100). That applies to Admiral markets conditions though.
If you would like to use the algo, contact me in telegram @yordan_k or drop a line to support@traders-terminal.com and we will figure out the numbers and what might be the minimum capital for your broker. Make sure to mention your Broker Name & Leverage.
Broker
My personal choice is Admiral. I’m not affiliated with them in any way, I just like the conditions after checking a few brokers. As mentioned above, they offer multiple jurisdictions to chose from. Support is excellent. They offer very big variety of asset classes, including investment accounts (no swaps and no leverage) among ETFs and other.
Account Type
Both MT4 and MT5 platforms are welcome.
Is VPS required?
No. But it is strongly recommended. An alternative is to use your computer but you will have to run it 24/5. Otherwise you may miss trading opportunities.
If I missed to cover anything, feel free to drop a comment below. As usual criticism and opinions are welcome!