In the Google search engine, almost 1000 people a month type the words “Automated Trading Strategies”. This phrase makes me smile. Let me tell you why.
You’ll see that the words “automated” and “strategies” don’t really go together in the lexicon of a savvy trader. When a trader thinks of a trading strategy, he thinks more in general terms, such as:
“I will focus on newly issued NASDAQ stocks trading below $2 and buy them on the first pullback after an initial price surge.”
In this example, the word strategy is more general and global in its meaning with respect to actual market prices.
However, a strategy cannot be automated unless it is precise rather than general. For a trading approach to be automated, it must be based on specific market prices, and trading strategies are too general to lend themselves well to automation.
I will try to explain myself better.
Taking the example above, “I will focus on newly issued NASDAQ stocks trading below two dollars and buy them on the first pullback after an initial price surge”, I can turn the statement into a more accurate trading statement by saying:
“If this is a NASDAQ market AND if the average closing of the last 10 days is less than $2 THEN if there is a price expansion on a daily bar AND where the daily range of that expansion bar is three times the average range of the previous 10 daily bars AND the high of the expansion bar is greater than the lowest low of the last 10 bars PLUS three times the average range of those 10 bars THEN I WILL BUY IF AND WHEN price returns to the high of the expansion bar minus half of the average range of the last 10 bars”.
The second statement is a mouthful, but it’s accurate, it’s programmable, and it can be tested for validity in any market. In theory, using a computer and the right software, you could test this idea using a thousand years of daily bar data.
But the second statement, the bite, is no longer really a STRATEGY. It is a TRADING SIGNAL and could be part of a TRADING SYSTEM.
The word “strategy” does not generally apply to buying at a specific price and therefore CANNOT BE AUTOMATED. If a trading approach has specific predetermined rules that dictate the exact price at which a market should be bought or sold, it is called a TRADING SYSTEM, not a TRADING STRATEGY.
So how did the phrase TRADING SYSTEM become TRADING STRATEGY?
That is how. In the early 1990s, government regulators and agencies sought to extend their power and influence by forcing anyone who gave “market advice” to register with the government, conduct tests, pay fees, and submit to government reviews and audits. And obviously this process involved censorship of ideas.
I did not register with the government and around 1999 I was arrested for posting articles about commerce on the Internet. I had to travel to Los Angeles, testify under oath for several hours, and pay my attorney $25,000 to escape the tentacles of government registration, regulation, and censorship.
Originally, the government tried to regulate the Internet, software, and even newsletters that contained information about trading and markets. But due to legal challenges from free speech advocates, the government backed down, and it soon became apparent that market advice, as defined by the government, meant only giving precise and specific recommendations about the price at which to sell. should buy or sell a market.
So everyone started using the phrase TRADING STRATEGY instead of TRADING SYSTEM to avoid giving the appearance of giving specific market advice that could subject them to government registration and regulation. Probably the largest commercial software developer at the time, Omega Research in Miami quickly removed any mention of SYSTEM from their software and replaced it with the word STRATEGY.
And after that, everyone started using the phrase TRADING STRATEGY when they were actually talking about trading systems. I believe the phrase “trading strategy” was invented, for very practical reasons, by the now-defunct organization Omega Research as a euphemism for “trading system.”
But it has been a euphemism that has stuck and is now frequently used and Googled by marketers.
But in my opinion it is a misuse of the word when combined with the word automated. You cannot automate a trading strategy; you can only automate a trading system.
Our country is great and for the most part so is its government, but I think this story remains a warning, albeit a bit humorous, of how the power of government regulation can change the way we use the English language and, in fact, how the government can force the IMPROPER use of the English language.
And I insist again, there is no such thing as automated trading strategies.
