What you Need to Know About the Future of Trading

tradingsystems

The business of trading is going to AI and more algorithms in the hands of new traders and retail investors. If you are trying to figure out what headlines are going to drive prices, you’re a better person than me. I would rely on computers to do that.

Bill Dunn, a 100% purely systematic trader since the early 70s, has been incorporating all the data he can find and incorporates that into his model.

Since 1974, he has taken only 1 discretionary “trade” and that was in advance of December 31, 1999 or the Y2K issue. The trade was to go flat and offset all his positions since he had no historical information to base his decisions on – including existing positions. This trade was taken to protect his clients’ funds. Other than that, he has only traded system generated orders for over 40 years.

If you are trying to raise capital, you’ll have to have a good answer for prospective clients as to why you think you can shoot from the hip and make clients money as a discretionary chart reader

In that regard, you are the share price and security. What information does the potential / allocator have based upon your behavior around security selection and trade management that will give them enough confidence in you to give you an allocation.

You’ll make more money by managing OPM – Other People’s Money and taking an Incentive Fee. If you are trading $100,000 of your own money and you’re up 20% for the year (nice job!) you have $120,000. If you are concurrently running $1,000,000 of client funds and you’re up the same 20%, you now have $160,000 to your name – an extra $40,000 in Incentive Fees. [20% of $1,000,000 is $200,000 and of that you get 20% as an Incentive Fee, or $40,000. Add that to your own $120,000 and you get $160,000. You have 33% more to trade with. Now keep repeating this process and you see why it makes sense to run OPM as soon as you can with a backtested model.]

Ray Dalio feels that you should learn to code regardless of the industry that you’re in else you’ll be replaced by a computer. The computer can make the decisions faster, without emotion, and without error. Ray makes his decision in parallel with the computer and it provides “check and balances” between his thinking and what the calculations can show. He also won’t leave out a key piece of data.

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By programming all the data you can analyze into an algorithm, you become the equivalent of the “card-counting trader.” If you’re not, you’re trading will become that of a donkey dabbler or weekender going to Vegas for the fun of it. You may very well work hard, but when you focus on the wrong criteria – like the growth prospects of electric typewriters – you are going to eventually get smoked.