Mistakes in automated trading

Mistakes in automated trading

The same as almost all traders

When I started I was convinced that I was very smart and that I would not commit the usual mistakes. Probably thinking that I was better than others was my very first mistake. I ended up falling into all the typical mistakes of a beginner trader.

All the mistakes costed me a lot of money. My training costs were over $30,000, between trading courses and money loss due to mistakes. It was hard and painful to recover all that money, as there are no shortcuts.

The 5 most important mistakes

1. Thinking "how much will I gain" instead "how much will I lose"

It happened to me when I started with commercial EAs. They all promised a straight up equity curve and I wanted to believe them. Now when I allow an automated strategy to touch my money, I know exactly how much money will it cost to me in case it goes bad.

2. Thinking that making money with martingale or grid systems is a matter of reducing lot size

I thought that avoiding greed and reducing the lot size I would avoid the inevitable Margin Call of those systems. But that is not true. Reducing the lot size only delays the Margin Call some hours or days because you are always risking your whole account on each trade.

But in addition to this, I realized another interesting thing, that even with low risk, I am not prepared psychologically to get more than 25% drawdown.

I learned too that backtests in grid or martingale systems are useless, as the worst case scenario is never there (the worst case scenario is always wipe account in that case, and you can never reduce the risk enough to avoid it).

3. Believing in fast and easy money

I used to buy every equity curve that goes straight from 10,000 to millions in some years.

Now I choose simple strategies that exploits simple market inefficiencies with 1 or max 2 indicators and without filters and good money management.

That obviously implies understanding the underlying strategy and being able to trade it manually or predict it's trades.

4. Thinking that the brokers are against myself

I thought that brokers gave prices to buyers and sellers and earned money with spreads. But the reality is far more complex.

First, there is the herd. All of us.

Then, there are trading Syndicates and big floor players, that are commonly known as the Smart Money. Note that I am not including here the big funds (they are Herd as us).

Then there is the actual brokers, who can see both sides of the market (they can see the big orders placed by the Smart Money so they can avoid trading against them).

So, in the end, the brokers (known as Market Makers too) gives us a good BUY price (lower) only if they have SELL orders from Syndicate traders in they books that indicates that the market will go down. If not, they will give us a bad price (higher).

Brokers in trading are no different than any other market maker outside trading.

5. Thinking that good systems are the most important thing

First I thought that with a system better than a coin flip and symmetric Stop Loss and Take Profit one could make money forever.

Then I studied a lot and understood that I was wrong. I realized that position sizing and risk management is 70% of the success, then 20% is psychology and 10% is the system.

Then I studied a lot more and realized that I was wrong again. I realized that understanding the systems you run, understanding the market, knowing yourself and a having deep knowledge about statistics are the most important things.

Once you achieve deep understanding of your systems every piece fits in it's place. You will not overrule a trading decision from your system, you will not have psychological problems and you will not have to take any decision as everything will already be planned.