INCORPORATING ALGORITHMIC TRADING SYSTEMS IN YOUR INVESTMENT AND TRADING STRATEGY

By Ilan Levy-Mayer

Algorithmic trading systems can provide unique opportunities for both investors and traders.

Although the nomenclature of algorithmic trading may seem confusing at first glance, the name simply denotes the possibility of using computers to execute pre-determined trading strategies based on price levels, market conditions and selected indicators.

It’s important to begin any discussion regarding the commodity futures markets and derived algorithmic programs with the understanding that these are risky markets and are not suitable for every investor and only risk capital can be used in any commodity futures algorithmic trading system.

For traders themselves, interesting possibilities emerge due to pre-determined automatic execution of trades. Some traders openly acknowledge dreading the grind of spending hours in front of their computer screens waiting for their key trading indicators to give them the go-ahead to place their trades. Those wishing to see automatic execution of their pre-determined and pre-defined trading levels may welcome the implementation of algorithmic trading systems. Using these types of trading programs, the trader no longer is forced to watch and monitor graph and charts continuously and can allow the computer to take over trade execution when certain prices and key indictors kick in. This also has the advantage of taking one of the key possible trading pitfalls out the equation, namely emotion and emotional attachment in the moment, to one’s trades, whether good or bad. Experienced traders are keenly aware of the “fear and greed” factor that weighs heavily in many trades. Algorithmic trading systems or “black boxes” as they are sometimes referred to, help to eliminate this possible trading pitfall.

For commodity futures investors, the possible advantages of adding algorithmic trading systems to one’s portfolio are numerous. Harry Markowitz, the noble prize winning economist, studied the effects of asset risk, return, correlation and diversification on probable investment portfolio returns and is regarded as the father of modern portfolio theory. He concluded that alternative investments, which include automated commodity futures trading programs, offer the distinct possibility of offering a non-correlated asset class to traditional portfolio positions consisting merely of stocks and bonds. Why is this non-correlation important? In many instances, it facilitates the reduction of the over-all volatility in one’s portfolio. Take, for example, a large market move in either direction in the stock market. With a traditional portfolio this market gyration may produce very large net effects in a purely equity and bond based positions portfolio. Adding a non-correlated asset class to balance this seesaw motion can potentially provide a smother weathering of a financial storm or stock market downturn. It’s not a stretch to imagine that many investors in the 2008-2009 time frame wished they had several additional asset classes in their portfolios during that major market downturn after the bursting of the housing bubble. This would certainly also include those investors that went “all-in” in equity positions at the height of the dot-com bubble.

For both traders and investors, algorithmic trading programs can potentially provide distinct advantages; these include, among others:

A much better chance of proper trade execution versus a manual approach
Trades being executed quickly to avoid missing price targets in quickly moving markets
The ability to back test trading strategies on historical and real time data
The capability to automatically check many market indicators instantaneously and simultaneously

In addition to these advantages, algorithmic trading programs can be designed to trade any of the major market trading strategies including, but not limited to:

Day trading strategies
Swing trading
Option premium price capture strategies
Fast arbitrage trade execution
Fibonacci price retracement strategies
Trading range or Mean Reversion implementation
These trading programs trade the upside in addition to downside price movements in the underlying commodities.

The important caveat of risk capital deserves to be mentioned again. These are risky markets and are not suitable for every investor and only risk capital can be used in any of the investment programs that we offer here at Cannon Trading Co.