Archive for November, 2010

Robots, Automated Trading Systems and other Nonsense

I try to keep up with the latest, greatest new innovations in the investing industry and lately I have been seeing a plethora of systems that absolve the trader of trading responsibility and promise that a robot or trading system will heap untold profits on the purchaser of the system.  Even better, you can be the proud owner of one of these robotic systems for a mere $239.

My initial thought was, “why have I spent a lifetime learning about trading when all I had to do was plunk down $239 and sit back and count my fortunes?”  More to the point, why hasn’t Wall Street dumped the army of traders and strategist and simply installed a robot and reap trillions from an unsuspecting market?

A quick Google search on one of the brand name robots yields pages of favorable reviews on the merits of the products, though I didn’t recognize any of the individuals reviewing the robotic software.

I did, however, find some reputable reviews from respectable and well known sources and their conclusions were much what I expected.  In short, keep your $239.  The performance of these trading robots was dismal, at best.  And this makes sense, when you think about it.  Who in their right mind would be selling a product that can make hundreds of thousands of dollars and then turn around and sell it for $239? In short, if I had a goose that laid golden eggs I sure wouldn’t be hawking it on the internet for a couple of hundred bucks.  To be sure, if I had a goose that laid golden eggs the only individual that would know about it is ME.

But automated systems and trading robots are indicative of a trend that I have noticed developing in recent years.  Let’s face it; trading is difficult and risky, plus the learning curve is very steep and expensive.  Many would be traders would like to skip the treacherous indoctrination phase of trading and jump straight to the phase where you consistently make money.  And who can blame them?  It is only human nature to take the path of least resistance.

There is a problem in this thinking, though.  You have to pay your dues. In order to trade effectively you have to learn to trade.  Learning to trade is a frustrating, knuckle-biting, anger-inducing process and not for the faint of heart.  Further, there are no real shortcuts to learning to trade…short of learning to trade.

Of course, the good news is that once you have developed the ability to consistently trade profitably it is a skill that you have learned for life.  There are no shortcuts, so save your $239 you would have spent on a trading robot and buckle down to the business of learning to trade.

Related Blogs

Do You Know the Commodity Channel Index?

The Commodity Channel Index has become, in recent years, a very popular index and used for a variety of trading purposes.  In my trading, I use the Commodity Channel Index (CCI) to indicate potential buy/sell decisions and, more importantly, to identify areas of market noise.  It is especially important to avoid trading in periods of market noise because the market is generally without a trend and engaged in normal backing and filling operations.  I like to trade with the trend, and that should come as no particular revelation to most traders.  Quite simply, your chances of succeeding when trading with the trend are significantly higher than trying to pick out retracements and market swings.

The Commodity Channel Index is not a particularly new indicator; it been around for quite some time.  Donald Lambert initially introduced the Commodity Channel Indicator in 1980, and variations and trading methodologies using the indicator have increased exponentially since it’s original inception.

From a semantic standpoint, the Commodity Channel Index is misnamed; it is actually a momentum oscillator and should be used as such.  It is a great primary indicator, but should always be used in conjunction with another technical analysis method.  That specific method could be a corroborating oscillator, or a rate of change indicator, or even volume analysis.  The point is a simple one; don’t go it alone with the Commodity Channel Indicator as it doesn’t give you a complete analysis of what is actually occurring in the market.

There are three lines that are of importance on a typical CCI chart.  The zero line indicates a general area of market equilibrium, and the +100 and -100 line indicate potential overbought and oversold conditions.  As I mentioned earlier, there are a variety of methods developed by trading innovators to utilize the CCI, and many are dissimilar in their market indications and methodology.  To be sure, it is essential to be familiar with a specific method of analysis before jumping into live trading using the Commodity Channel Indicator.

One of the potential problems many traders experience is the tendency of the CCI to whipshaw traders in and out of trades.  It is not uncommon, especially in low volume trending markets for the CCI to oscillate along the overbought or oversold lines.  In these situations, the CCI line hovers around the +100 and -100 lines for extended periods of time.  It is important for traders to identify this phenomena early on because the indications from the CCI will have you bouncing in and out of the market and depleting your trading account.

On the other hand, there are times when the CCI gives some of the clearest entry and exit signals you will experience.  It takes time and experience to learn the nuances of this indicator and I don’t recommend jumping headlong into CCI use without proper preparation. There are a number of excellent books written about the use of the CCI and the internet is loaded with all sorts of potential CCI trading systems.  Of course, I would recommend carefully evaluating each system before implementation, as some systems are much better than others.

That being said, I feel the E-mini Trading Professor utilizes the CCI in a superior methodology and provides excellent buy/sell signals.