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The projections for the expansion of robo-advisors are bold, to say the least. But simply because it is a rising pattern doesn’t mean it is best for you. It depends upon how you want to function as an investor and what your objectives are. So, let’s take a closer look at these automated providers. Who Are the Robo-Advisors? A number of the most well-liked robo-advisor providers are Wealthfront, Betterment, Personal Capital and FutureAdvisor. These are all impartial platforms, although large funding administration agency BlackRock acquired FutureAdvisor in 2015. Several different brick-and-mortar monetary establishments have launched robo-advisors to complement their providers. Among them: Charles Schwab, with its Intelligent Portfolios...
Elliott and Gann have become household names among the worldwide trading community. These pioneers of technical analysis developed some of the most widely used techniques in the field. But how did Ralph Nelson Elliott and W.D. Gann come up with these techniques, and how did they become so successful? Truth be told, it's not as difficult as it sounds! This article takes you through the process of building your own custom indicator, which you can use to gain an edge over the competition. Background Recall that the theory behind technical analysis states that financial charts take all things into account – that is, all fundamental and environmental factors. The theory goes on to state that these charts display elements of psychology that...
Algorithmic trading (also called automated trading, black-box trading, or algo-trading) uses a computer program that follows a defined set of instructions (an algorithm) to place a trade. The trade, in theory, can generate profits at a speed and frequency that is impossible for a human trader. The defined sets of instructions are based on timing, price, quantity, or any mathematical model. Apart from profit opportunities for the trader, algo-trading renders markets more liquid and trading more systematic by ruling out the impact of human emotions on trading activities. Algorithmic Trading in Practice Suppose a trader follows these simple trade criteria: Buy 50 shares of a stock when its 50-day moving average goes above the 200-day...
While using algorithmic trading, traders trust their hard-earned money to the trading software they use. The right piece of computer software is very important to ensure effective and accurate execution of the trade orders. Faulty software, or one without the required features, may lead to huge losses. A Quick Preview on Algorithmic Trading An algorithm is defined as a specific set of step-by-step instructions to complete a particular task. Be it the simple-yet-addictive computer game like Pac-Man or a spreadsheet that offers huge number of functions, each program follows a specific set of instructions based on an underlying algorithm. Algorithmic trading is the process of using a computer program that follows a defined set of...
Tips for beating the market tend to come and go quickly, but one has held up extremely well: if executives, directors or others with inside knowledge of a public company are buying or selling shares, investors should consider doing the same thing. Research shows that insider trading activity is a valuable barometer of broad shifts in market and sector sentiment. But before chasing each insider move, outsiders need to consider the factors that dictate the timing of trades and the factors that conceal the motivations. Reasons to Follow Insider Trading The argument for shadowing insiders makes a lot of sense. Executives and directors have the most up-to-date information on their companies' prospects. Intimately acquainted with cyclical...
Have you ever had to endure the tedium of listening politely to a loquacious individual at a party brag about the killing he made through investing in stocks or the stunning returns his little-known investment manager generated? If you’ve wondered whether there’s a way to get in on the action, mirror trading or investing may be the answer. But before you plunk down your hard-earned savings into a mirror trading account, you should know this fad has a number of drawbacks that may restrict its appeal to a tiny slice of the investing populace. What is Mirror Trading? The concept of mirror trading was first introduced in the foreign exchange market in the early 2000s but it took a few years for the equity market to catch on. Mirror...
Futures trade with high leverage in comparison to the stocks making up the indexes. Buying 100 shares of the SPY (the ETF that tracks the S&P 500 index) would cost nearly $29,200 at the time of this writing. Even with 2:1 margin, a trader would need $14,600 to maintain the position. To trade one contract of the ES (the S&P 500 eMini future), a trader only needs $6930. For an intraday trade, the margin could be as low as $500! The first half hour to hour of the equity markets can be very volatile. Sometimes it seems like prices are fluctuating wildly with no rhyme or reason. However, there is a technique that could help you predict the morning price movement and even potential price reversals. This technique could be used for...
For a time, it looked as if high-frequency trading, or HFT, would take over the market completely. In 2010, HFT made up over 60% of U.S. equity volume. But the trend may be waning. In 2009, high-frequency traders moved about 3.25 billion shares a day. In 2012, it was 1.6 billion a day, according to Bloomberg. At the same time, average profits fell from “about a tenth of a penny per share to a twentieth of a penny,” the report noted. In 2017, HFT accounted for just under half of all domestic equity volume. In HFT, powerful computers use complex algorithms to analyze markets and execute super fast trades, usually in large volumes. HFT requires advanced trading infrastructure like powerful computers with high-end hardware costing huge...
There is an old saying in business: "Fail to plan and you plan to fail." It may sound glib, but those who are serious about being successful, including traders, should follow these eight words as if they were written in stone. Ask any trader who makes money on a consistent basis and they will tell you, "You have two choices: you can either methodically follow a written plan, or fail." If you have a written trading or investment plan, congratulations! You are in the minority. While it is still no absolute guarantee of success, you have eliminated one major roadblock. If your plan uses flawed techniques or lacks preparation, your success won't come immediately, but at least you are in a position to chart and modify your course. By...
Do you find yourself flitting from one way of trading to another? Or constantly tweaking the way you are trading, never quite finding that consistent winning streak? The internet is an amazing thing – there are thousands of trading strategies described in forums, social media and YouTube videos etc. But how do you know if they work? The answer is much simpler than it seems. Test the strategy properly! A proper test constitutes at least 30 correctly taken live or demo trades. The two elements to this are ’30 trades’ and ‘correctly taken’. Why do you have to wait for 30 trades? One of the biggest mistakes that newbie traders make is to give up on a trading strategy after a run of losing trades. The thinking behind doing this is...
Momentum investing was all the rage in the 1990s when the markets were rising like a hot air balloon. This strategy is based upon the idea of purchasing whatever sector of the market has posted the greatest earnings or price gains in the market over the past year. Many funds, such as American Century Ultra (TWCUX), relied heavily on variations of the momentum strategy during this time and when the tech bubble burst, they went down with it, some harder than others. But a new group of studies has indicated that momentum investing is actually a viable long-term investment strategy and has performed admirably over longer periods of time. The Research AQR Capital Management published a white paper in September of 2014 that was titled...
The term “stock exchange” tends to conjure up images of a room crowded with men in suits – one hand pressing phone firmly to ear, the other waving furiously in the air. Once upon a time those iconic images were an accurate representation of the controlled chaos that was the floor of the venerable New York Stock Exchange, or NYSE as it is known. When NASDAQ launched in 1971 as the world’s first electronic stock market, it set in motion the changes that would lead to the complex and fragmented status of markets today. A status better represented by the image of the "1s" and "0s" in a line of binary code. As alternative market centers proliferated – some exchanges, some not – so too did the choices of where to execute a trade. Today there...
Just like good boy scouts, traders need to be prepared for the unexpected. It is virtually inevitable that part of a trader's workstation will melt down at some point, and this can lead to a financial loss. Platforms can experience problems, including surprises in strategy automation, for which traders need to plan. And, although it (thankfully) doesn't happen very often, entire exchanges can even shut down. All traders need a well thought out plan - in writing - to deal with these types of eventualities. If traders are ready to deal with problems as they arise, they'll be back to trading sooner - and hopefully with a minimum of stress and financial loss. Think of this preparation as a form of risk control. Important Numbers At the...
With the changes in the perception of Forex trading from being a high speed, high risk gamble, to being a scientifically driven investment vehicle, supported by social media, there are likely to be many more Forex traders in the coming years. All of these will have dreams, big or small; some are destined to fail, many more will make a success of trading and if we were able to see inside the minds of each, we'd find clear reasons why some made it and others fell by the wayside. Jump in a car for the first time, set off thinking you know what to do because you’ve been a passenger so many times and you’re heading for a crash unless you’re lucky enough to be a natural driver. The analogy could well be applied to trading Forex where...
Introduction Many traders think that to make consistent profits in the markets, all you need is a holy grail. From my experience, a trading methodology or system is only one of the ingredients of success. The advancement of technology blinds us into thinking that all we need to be successful is state-of-the-art kit and the latest software. After all, banks fit into this category and they tend to do pretty well. However, technical wizardry is only of value if you know what to do with it. Does Warren Buffett rely on the latest technology to make his investments, or does he put his faith and his money into time tested principles of yesteryear? Modern technology is a useful tool for many traders, but to ensure it’s used wisely and to full...
Spread trading has been around since markets and exchanges were first developed. Exchanges and their markets were designed not for speculation but to transfer risk from one party to another; speculation made them more efficient through increased volume and tighter price spreads (bid/ask). Commercial trading companies and financial institutions apply hedging (long/short positions) to reduce their exposure and offset risk to their principal underlying positions across every type of commodity or financial instrument. This risk-averse approach is the driving force to their market activity and success. As a trader we can only speculate on price movement. In many markets, in particular futures, the price activity can be volatile and...
Headging is often considered an advanced investing strategy, but the principles of hedging are fairly simple. With the popularity - and accompanying criticism - of hedge funds, the practice of hedging is becoming more widespread. Despite this, it is still not widely understood. Everyday Hedges Most people have, whether they know it or not, engaged in hedging. For example, when you take out insurance to minimize the risk that an injury will erase your income, or you buy life insurance to support your family in the case of your death, this is a hedge. You pay money in monthly sums for the coverage provided by an insurance company. Although the textbook definition of hedging is an investment taken out to limit the risk of another...
When traders lose money, they often attribute the problem to a lapse of discipline. Such a lack of consistency, however, is actually the result of many different problems--not the cause. Traders lose discipline with trading for the same reasons that dieters lose discipline with dieting or people getting in shape lose discipline with exercise. Quite simply, our moods, needs, and mind states of the moment tend to overwhelm our longer-range intentions. We pursue short-term pleasures (and avoid short-term discomfort) at the expense of longer-term rewards. Here are some common reasons why traders (and most other human beings!) fall short of being fully intentional: Environmental distractions and boredom cause a lack of focus - All of...
The decision to trade online or through a full service broker will undoubtedly make a large impact on your bottom line. However, the impact may or may not be what you had in mind. If you aren't ready to begin placing your orders online on your own, despite saving money on commission it may be the most costly mistake that you ever make. While commission is baggage, a slightly higher rate it may be worth every penny assuming that your broker is truly giving you what you are paying for - reliable and efficient execution along with quality guidance in strategy and analysis. Hopefully this article will open your eyes to the realities of transaction costs. While experienced traders should look for low rates with quality service, novice...
Aside from charting tools and market research, there are two important but often overlooked decisions for a trader to make; choosing a brokerage firm and a specific broker. Each of these decisions are capable in having a profound impact in your overall trading results and you owe it to yourself to take the time to make an educated judgment. Choosing a brokerage firm Deciding on a brokerage firm is a significant decision and shouldn't be taken lightly. Before committing to a firm it is imperative that you research their services, experience, trading platforms and commission structure but more importantly whether your trading style and personality will be compatible. For example, a beginning trader shouldn't look to a deep discount...
Advances in technology have been the driving force behind the change and growth in the world of market speculation. One of the many recipients of faster and stronger technology is system trading as high speed computers now help retail and institutional traders develop systems, crunch numbers, and back test hypothetical results in seconds. In the world of professional money management, I have seen plenty of trading systems. Ironically, most don't seem to work and of the ones that do, they typically work for a bit and then fail. Being on the education side of the industry as well, I have seen hundreds of automated systems yet, I can only say that I have seen less than a hand full actually produce a consistent profit year after year. I...
Introduction In this article we'll take a look at two related practices that are widely used by traders called Backtesting and Data Mining. These are techniques that are powerful and valuable if we use them correctly, however traders often misuse them. Therefore, we'll also explore two common pitfalls of these techniques, known as the multiple hypothesis problem and overfitting and how to overcome these pitfalls. Backtesting Backtesting is just the process of using historical data to test the performance of some trading strategy. Backtesting generally starts with a strategy that we would like to test, for instance buying GBP/USD when it crosses above the 20-day moving average and selling when it crosses below that average. Now we could...
In this article the author explains the basics about Neural Networks and looks at the myths that have formed around them. In this age of previously unheard of technological progress many technology-related things either come unnoticed as they appear or, vice versa, are vastly extolled and turned into totems that inevitably attract a following of ardent worshippers. If such a popular technology-related phenomenon can make a difference to your business, it is, sometimes, vital to learn about this phenomenon as much as possible before you start with it so that you know what to expect from the selected technology and what to beware of while using it. For a modern trader, one of such potentially important phenomena is neural nets. So what...
What are the significant factors that need to be considered when looking to create a trading system. In this article we look at how to start creating your own system. Its long been understood by most and proven by experience that trading is a hard trade to ply, and those who decide to tread on this path have to take their bearings on a variegated sea of information, diverse and, oftentimes, controversial. A tyro trader is flabbergasted by the panoply of approaches, trading means, and celebrated personalities as soon as he opens his first trading magazine. Poised for choice, he kicks off browsing Internet forums, turns for dubious advice to his slightly more versed acquaintances or joins one of the guru-lead sects that dispense...
Throughout the years I've been trading and writing I've often written about mind set - having the right frame of mind for your trading so you become a winner. I've stated that it is our job to trade "futures," not "histories." The future is the next bar on your chart. You can't possibly know how it will develop, how fast prices will move, or where it will end up. Since none of us know where the very next tick will be, it's impossible to know where the tick after that will be, or the tick after that, etc. All we know at any one time is what we're seeing. Interestingly, what we're seeing may not be true. Trouble With Data If we are day trading, we are not sure that what we're seeing is a bad tick, especially if it is not too far...
At Rockwell Trading we develop and test up to 25 trading systems a month. The 10 Power Principles for Successful Trading Systems is a set of rules we established and refined to help us effectively evaluate a trading system. Using these Power Principles you too can find solid trading systems - whether they be those you develop yourself or those you obtain from other sources. You can be assured of a high probability of success by applying these simple principles. Principle #1: Few rules - easy to understand It may surprise you that the best trading systems have less than 10 rules. The more rules you have, the more likely you "curve-fitted" your trading system to the past, and such an over-optimized system is very unlikely to produce...
Mechanical systems do not work. Let me rephrase that. Backtested over several years of data, mechanical systems do not show a sufficiently consistent profit and an acceptably low drawdown for the small trader to trade consistently, comfortably, effectively and economically. To expand on that further, the results of a coded mechanical system might well show periods of excellent profits but, virtually without exception, they will also have draw-downs that most small traders would not be able to tolerate. In addition, most systems tested over several years invariably have considerable periods of losses, usually running over months if not years, plus long runs of losing trades. If you start trading a mechanical system at the wrong time...
In the first part of this article, which can be read here, we looked at choosing an instrument and timeframe to trade, as well as establishing the set-up and entry rules. In the second and final part we will consider how to establish exit rules as well as various filters and money management rules to maximise the profitability of the system. 6. Stop Loss Rules. Our strategy already has a natural stop loss in the stop order that does not get filled. The objective of the strategy is to capitalise on those days where the high or low for the day is in place early (9.30-11.45am). If we enter a trade on a breakout of either the high or the low and then the market subsequently hits the other stop we know that our trade is invalid. We know...
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