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Automated Trading 4: How does the automated strategies work?

24 Oct 2017,

After a short holiday break, I am back with another part of my series.

You ready?

In the previous article, we were talking about building automated strategies. Today we will go more into the depth and I will describe two basic building technologies.

But let’s start by repeating what it is, and what is not building of the automated strategies.

What is the building of the automated strategies?

Automated strategy building process is the way of using modern technology to search for profitable strategies. Then, we just build and manage our portfolio made from the strategies.

What is not automatic strategy building?

However the more important is what we should not expect from this method.

This is not a holy grail, where we press a button and earn money. This does not work. However, it is a strong servant that can find strategies, and then we just test and measure how the strategies are sensitive to changes in market, broker conditions, etc.

The biggest advantage is that this system works 24 hours a day. We can look for strategies even when we sleep or when we work, etc. We can evaluate the results in the night, during the weekends, at any time. We are not dependent on the markets. And that’s a huge benefit.

Simply said, we can say that automated building process helps to find strategies. It tests hundreds to thousands strategies per hour, and that saves us a lot of time because we do not have to explore roads leading to nowhere.

Methods of automated strategy building

There are two basic methods of automated strategy building:

1# random method

2# method based on “artificial intelligence”.

1# Random method of building strategies

Sometimes it’s called brute force. This method is very simple, yet effective.

How does it work?

Suppose we have 30 indicators, 30 price levels, 5 types of inputs and outputs. The random method takes some indicators, some price levels, some inputs and outputs … it randomly builds the strategy and then tests whether it works.

Tip: MACD indicator & Moving Averages

Advantages and disadvantages of the random strategy building process:

  • Unlimited possibilities – it is capable of testing all the possible strategies.
  • It is limited only by the number of elements available in the program.
  • Software, that I personally use (StrategyQuant) supports it.
  • Time-consuming (for the computer that has to processes all the operations, not for our own time)
  • It takes longer to find an interesting strategy because there is more waste.

2# Building strategies using “artificial intelligence”

The description of artificial intelligence is a little over exaggerated here, but it is mainly for easier understanding. It’s still easy to work with, it  is something effective in the background, but a bit more complicated, so how does it work?

Here we speak about work with so called genetic algorithms. Building automated strategies using genetic algorithms starts by building first strategies, and then continues with crossing them and trying to find new ones with better results. We simulate the evolutionary process known from the nature.

Advantages and disadvantages of the building process with artificial intelligence

  • The strategy is quite fast.
  • Computer time is used effectively.
  • Software, that I personally use (StrategyQuant) supports it.
  • In principle, system cannot go through all the possible strategies.

Conclusion

Building automated strategies is nothing complicated, and it is the path that leads to interesting results and saves us a lot of time. It would be a shame to ignore it or to have prejudices against it. You can easily test it in the trial version of our StrategyQuant, which you can register here for free.

In the next article, we will have a look at the results that can be achieved in real terms.

Recommended: Quick Guide to Meta Strategy

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