Starting your own algo trading can be both rewarding and challenging at the same time. The joy of starting something on your own and which trading on its own with a set of trading rules and zero human intervention is something that most of the traders love to have it.
However, the road to success when comes to algo trading is definitely not an easy one. There can be a gazillion different things that can go wrong. And innumerable hurdles might keep coming your way. Here are some of the most common mistakes that algo traders make that you should avoid.
Not conducting adequate trading research
Most of the traders approach algo trading without doing enough homework. They try to get a strategy from the market and without backtesting or backtesting with minimal data points they take the trading strategy Go Live as the strategy is visually appealing.
Some traders even do backtest only for 2months or 6 months of backtest results and get mesmerized by the trading results. In reality, even 6 months of backtesting doesn’t cover all the market scenarios (sideways markets, trading markets, highly volatile markets, tightly compressed irritating markets, markets with a big gap up, gap down & major events days).
Take Strategies to live without passing Montecarlo analysis & slippage modelling is again a wrong approach.
Know your Algo Trading Software
Know the nuances and operations of your algo trading software helps a trader a lot to avoid unwanted trading issues. For Example, if you are an Amibroker user and algo trading is ON then minimizing Amibroker software might not trigger orders unless are aware of the workaround procedure. In Amibroker, charts are refreshed only when they are placed on the active chart sheets so that CPU resources are not wasted on invisible chart sheets.
Mistakenly an algo trader could minimize his amibroker screen or to study some other charts he might open a new chart sheet which makes the algo trading charts inactive. That will eventually result in algo getting into a dormant mode and any fresh trading signals from amibroker charts might not trigger to the terminal at all.
To avoid this, charts has to force certain refresh rate using dedicated RequestTimedRefresh() function in the Amibroker AFL code. By adding the one-liner code RequestTimedRefresh(1,false); makes amibroker to refresh the charts forcefully even if the charts are in the inactive mode or in minimized mode. This workaround also very useful especially if you are using sound/popup/email/mobile push alerts.
Doing Algo and studying charts at the same time
When your trading algo software is also your technical analysis software then comes one more common trouble where many traders struggle as it could lead to unwanted trading signals hitting your trading terminal. And traders will be wondering how come Algos are triggering orders when there are no signals on the charts.
Above mentioned situation could arise if one change the algo trading mode of the chart to a different symbol or possibly using the same template for different charts. Lets assume that algo is running on Bank Nifty Futures charts and charts are in active mode (AFL coding parameters might be mapped to Exchange Symbol of Bank Nifty Jul Futures) however out of traders curiosity to study some other charts, For example if he change the current charting symbol from Bank Nifty Futures to Eichert Motor Futures then still the AFL parameters mapped to exchange symbol Bank Nifty Futures). So if the signal comes in Eicher Motors it will trigger orders in Bank Nifty Futures. As an algo trader if one is not aware of this simple stuff might get puzzled and questions why all in sudden unwanted signals are getting triggered.
If you faced this issue that one should stop avoiding charts study when algo trading is on the same machine. Another alternative is to switch to VPS Servers where your algo trading machine is less disturbed and also one will have enough power and Internet backup and remains undisturbed 99% of the time.
Avoid running in systems without adequate infrastructure
Reasons to avoid local machines
1)avoid running in machines which often hangs due to older machines, faulty hardware or systems with vulnerable virus/malware attacks
2)without sufficient Electricity backup never ever think of doing algo (EB supply still an issue in Indian Markets)
3)Avoid running in machines which goes to auto sleep mode if the system is inactive for few minutes/hours
4)Avoid running in machines which takes auto restart due to windows upgrade. At times system restart could happen due to forced windows upgrade.
5)If you are leaving the algo trading system unattended. Inform your friends/family to take care of it. Any Accidential shutdown might harm the portfolio.
Unrealistic Expectation on Algo Trading
Algo trading is one way of making passive income generation. However if one should avoid doing algo trading if the following statements are true.
1)if one is holding an unrealistic expectation on their algo returns (For Example making Rs5000 every day, making 30,000 every month).
2)Unable to handle 6-7 consecutive losses or more losses emotionally.
3)Unable to handle drawdown periods. Sometime drawdown periods could even exceed more than 3 months.
4)trying to fine tune the trading system parameters after a couple of consecutive losses
5)Overleveraged capital. Urge to trade big lot size with a small quantity of money. Without allocating money to manage the drawdown
These are some of the day to day challenges faced by some of the new & aspiring algo traders. Will try to add if I find any meaningful issues faced by algo traders. Let me know in comments if you faced similar or unique issues in your algo trading career.