People hate losing. We’re also bad at it. In the face of a loss, we often make riskier decisions that would normally be unacceptable to us. Human emotions can be the downfall of many trading accounts, which is why some of the most successful traders are programmers, those who seek to eliminate emotional or hunch-based trading decisions in favor of rules-based systems.
Last year, David Siegel, AI expert and co-founder of Two Sigma Investments with more than $35 billion under management, claimed that one day “no human investment manager will be able to beat the computer.” The problem, as Siegel sees it, is that “the human mind has not become any better than it was 100 years ago, and it’s very hard for someone using traditional methods to juggle all the information of the global economy in their head.”
We may be closer to that day than most realize. According to the “2016 Rich List of the World’s Top-Earning Hedge Fund Managers” by Institutional Investor’s Alpha magazine, eight of the top 10, and half of the 25 wealthiest are quants who rely on a combination of mathematics and technology.
Algorithmic trading can be an effective, systematic way to manage and allocate risk across any number of markets. Without a systematic approach, you can easily miss market opportunities, suffer from ego depletion, or spend most of your time trying to change your luck on trades to no avail. William Eckhardt said, “The problem in a nutshell is that human nature does not operate to maximize gain but rather to maximize the chance of gain.”
So how do programmers become traders? Trading APIs! Programmers can access free trading through FXCM’s Trading API.
FXCM’s Trading API allows savvy programmers to set up an algorithmic trading system to open and close trades automatically. There is no searching the markets for trade ideas, or examining charts to find a favorable opportunity. The system does the work. The programmer defines the parameters of the trade, and the system implements the code in the electronic marketplace. The benefit here is that the technology behind the trade removes the potential for human error.
Trading programs can utilize many different programming languages and systems to get the job done. Some automation programs can be acquired prebuilt. FXCM Apps, the hub of FXCM’s automated strategies, is often the go-to starting point for many programmers getting into forex and CFD trading.
Backtesting and optimization give the programmer a better chance in the market than the average day trader who goes with his gut to navigate the market. Using backtesting software, like Marketscope, programmers can pore through historical data, running their automated systems to correct hiccups in the algorithm.
Programmers are ideal traders because of the analytical mindset and clear thinking required to build systems. The truth is that most traders have not clearly defined their trading rules to a degree that would allow a computer to make all trading decisions.
However, a trader who codes can build a trading system that makes consistent decisions and utilizes historical backtests to formulate a hypothesis before risking a penny. In contrast, traders without a system must constantly monitor the market to generate hunches, and turn them into trades, which may be heavily influenced by decision fatigue and the trader’s feelings at that time.
FXCM, one of the leading forex and CFD brokers in the world, did a study of millions of trades in its Traits of Successful Traders guide. At its simplest, a key component to the success of traders was the reliance on more programmatic trading, such as predetermining an acceptable risk-reward ratio and setting stops and limits to carry out the plan. Ultimately, it is the trader with the programmatic skillset who is able to develop comprehensive trading systems that give him the advantage of consistency over his non-systematic trading peers. Top-down execution without human involvement removes emotion, so that whether a win or loss was realized, the system’s integrity is never broken. This gives the programmatic trader the needed emotional separation from the system, so that consistent improvements in the mechanics of the system can improve the precision of the algorithm.
Creating systems in the finance market offers some interesting challenges to the programmer. As the markets are now nearly exclusively electronic, savvy programmers can seek to capitalize where previously only the strongest finance minds tread. The game is changing. Are you up for the challenge?
Forex trading on margin carries a risk of losses in excess of your deposited funds. The products may not be suitable for all investors. Please ensure that you fully understand the risks involved. Algorithmic trading does not take into consideration your individual personal circumstances and trading objectives. Therefore it should not be considered as a personal recommendation or investment advice. There is no guarantee that the systems, trading techniques, trading methods, and/or indicators will result in profits or not result in losses.
 Schwager, Jack D. (2008). The New Market Wizards: Conversations with America’s Top Traders. Hoboken, NJ: John Wiley & Sons, Inc.