Becoming a Successful Trader — Common Myths III

Because of influence from social media and also human nature itself, there are many myths in investing and trading. In fact, there is no absolute right or wrong in many things. It is true that independent thinking after rational understanding can avoid falling into many trading pitfalls.

Pitfalls of algorithmic trading

Many people have great aspirations for investing, but they are busy working and have limited time to follow the market. So, they turn to purchasing unknown trading algorithms from others, thinking that they can make easy money just by keeping that algorithm running. Yet, the results are often the opposite.

Facts about algorithmic trading

1. Overly decorated performance: the internet is full of algorithmic trading strategies with stellar performance, with win rates over 70% to 80% or extremely high annualized returns. Behind those reports are often excessive parameter calibrations or unrealistic trading conditions. After all, it is not difficult to piece together a holy grail using historical data, but the chance of realizing actual profits in the future from an algorithm created in this way is slim.
2. Fees and price slippages: it is not uncommon to see strategies with a large number of transactions and a beautiful equity curve. They often do not take into account fees and slippages that will occur during live trading. The more frequently a program trades, the more it must pay attention to the impact of fees and slippages. Most of these types of strategies quickly become unsatisfactory once the costs are added.
3. The significance of past performance: algorithmic trading is researched and developed using past data. No matter how brilliant the performance was in the past, it does not mean that the market will remain unchanged in the future, nor does it mean that the strategy can maintain its performance. Without knowing the methods and logics behind the algorithmic trading strategy, it is meaningless to judge the effectiveness of the strategy based solely on its past performance.
4. The life span and survivability of strategy: market changes rapidly and follows no fixed rules. Also, it is more often than not that algorithmic trading strategies become obsolete faster than expected. It is very impractical and almost impossible to rely on one single strategy to make long-term and stable profits from the market.
5. Profitability of algorithmic trading: there are indeed many traders who have made long-term profits from algorithmic trading, but algorithms are just a way of execution. No matter what method you use to study and participate in the market, overcoming a large number of obstacles and spending a lot of time and efforts are the only way to make consistent profits in the market.

Algorithmic trading has its advantages and disadvantages. The most dangerous thing is to use a algorithm you don’t understand and think you can make money from it.