Just back from being out of town. I hope everyone had a great 3-day holiday weekend.
TFF,
My assumption is that automated systems are based on broad diversification and small incremental returns, meaning low rates of return on capital. Am I correct?
Broad diversification: Yes, I agree. By using automation, you are able to simultaneously watch many more positions than you could ever manually monitor. This allows diversification to enable your good trades to often simultaneously offset your bad trades, netting an overall profit despite many bad trades.
Small incremental returns: By and large, yes. This is something I associate more with the issue of timeframe that with the issue of automation. Very short term oriented trading is typically conducted to generate numerous trades which each make a small incremental return. Assuming that the intent of a trader was to generate longer term trades, then automation would be less necessary, since the trader could more easily monitor a very large number of positions with average trade durations of many weeks.
Low rates of return on capital: I guess it depends on how you define low versus high rates of return. I posted my numbers of ET several months ago at the following link:
elitetrader.com
My average annual return over the past several years has been consistently over 100%, with modest relatively drawdowns due to the diversification effects. This year, I am currently up +55% YTD, and my largest YTD drawdown has been 2% (have been trying to pull out of it for the last ~2 weeks). These returns are small compared with the 200-1000% annual return booked by many active traders in the bubble days, but I have a very low tolerance for risk, and am willing to sacrifice return in order to keep the downside risk limited. => One blowout can end a career, so it's too much for any fulltime trader to ever risk.
Anyway, as one of the threads automation people, I hope this helped to answer your question. I'd be glad to go into more detail about automation for anyone with additional questions.
-Eric |
