The Automated Trading Journey

This lesson will lay the foundation of trading, which is very helpful if you're starting to be an automated trader.

Idea generation is very important to being a successful Profectus student. In order to develop and build successful automated trading strategies, you will first need creative ideas. In later lectures "creative thinking and idea generation" will be covered in detail. It's all about the combination in my opinion. Having a creative mind is one, but together with knowing how the markets move is a golden combination. On top, you will add your discipline and motivation to crush it in this industry.

Let's start with our market and why this is the right fit for Profectus.

The Foreign Exchange Market

The foreign exchange market is a place where buyers and sellers are actively exchanging currencies with each other. This market is primarily controlled by large financial institutions which are actively moving billions a day based on the numerous factors affecting this market. In a nutshell, these large transactions are leaving us, traders, with a lot of repeatable patterns which we can trade with a high probability of success in the long run. If you're ever interested in mastering the FX market by manually analyzing the charts, feel free to check www.newcapitalfx.com out for more information.

The currency market is the largest financial market in the world, with a lot of different currencies to trade from all over the world.

Personally, I've always focused on the most well-known and liquid currencies; 

• USD United States (Dollar)
• EUR Euro-Zone (Euro)
• GBP Great Britain (Pound)
• JPY Japan (Yen)
• CHF Switzerland (Franc)
• CAD Canada (Dollar)
• AUD Australia (Dollar)
• NZD New Zealand (Dollar)

Why do we trade it?

This market has been my favorite for the last 8 years of myself being involved in the markets. I have several reasons for this but the primary one is the fact that this market is very approachable for a starting trader. The costs of execution are relatively low, and with the ability of some leverage, it is possible to trade this market profitably with a small amount of capital. 

The FX market is open 24 hours a day, 5 days a week which allows us to get a lot of market data and more opportunities in general than markets that are only open during normal office hours. This market is also not that volatile, providing more clean price-action due to the fact that it won't just drop 20% in one day. In the crypto and stock market, these types of extreme moves are possible due to the lower amount of liquidity. In simple terms, liquidity is important for us as traders because it allows us to buy or sell at our desired price. In other words, high liquidity allows you to get into and out of the markets whenever you want. In the future when you might be managing tens of millions, it is possible in the FX market that you'll get more slippage on your trades, but this is a lot rarer than in low liquid markets. 

As with everything in life, there are some drawbacks to this market. The major one is something you might be able to relate to if you have been trading for a long time now. It is challenging to successfully predict the direction because it is not expected to go higher or lower in a higher time frame. When you look at a stock index such as the S&P 500 you can clearly see that the larger trend is always been up, over the 60+ years it exists. In the FX market, such clear trends do not exist. It will become clear to you that finding an edge in this market will provide you with a lot of capital gains, yet you'll see how challenging it can be. 

Is it something for a Profectus Student?

This market is ideal for us. It is a highly competitive market but the possibilities are endless. With a lot of manual retail traders trying to find an edge, our systems can be created to take advantage of this zero-sum game. The FX market is a great market to be in, even though the industry has bad publicity due to the online social media scams. At the end of the day, we are here to make money, and this market is the best place to do it. 

Automating Technical Analysis

The main framework of Profectus is the ability to automate technical analysis. Millions of traders are losing money by analyzing charts manually and drawing lines everywhere. This on its own can be an edge if you look at taking the opposite side of the trade of these retail traders. Yet, what we desire to show you is that technical analysis can be profitable if you just automate the right patterns into code and eliminate human error.

The largest issue for traders is that they either have a subjective strategy or they are trading a good strategy but they have psychological issues such as fear and greed.

In the video below I quickly want to show you a few ways of analyzing the financial markets. If you're already a New Capital student, you know exactly my particular style of technical analysis. 

Personally, I have spent a lot of my time figuring out what style is the best for me, I recommend you to create a basic understanding of all the styles because it might be necessary to understand them while you're building certain automated systems.

Trading Systems

A Trading Robot also called Expert Advisor (EAs) or Algo is a software tool, which automatically enters, exits, and manages trades in the market. An Algo or algorithm is a set of finite steps that will solve a mathematical problem. At each step, the computer makes a decision to undertake an action or not based on the data input.

Alright, alright, alright.

- Matthew McConaughey from the movie "Dazed and Confused"

We keep things sophisticated and simple (KISS) in this course. We want to avoid you being dazed and confused. However, do not take simplicity as an indicator of stupidity. The challenge of complicated things is to explain them in a simple manner.

A trading algorithm follows a predefined decision tree. A decision tree is a simple thing. You see a red traffic light. You stay. You see a green light. You go. The yellow light popped up? You better give full throttle to still pass that traffic light.

Every decision is based on a condition. In the case of the traffic light, the condition is based on colors. The triggered decision behind each condition leads to a binary yes or no answer. Am I crossing the traffic light or not. In trading that would mean entering a trade or not. In this simple day-to-day situation, we are facing two or even more (doubtful) decisions. The same accounts for any trading robot. You will be amazed by the inner mechanics of sophisticated trading systems. Most of them consist of fairly simple decisions and still make money.

EAs are used to trade the full range of assets: Currencies, cryptocurrencies, futures, and stocks. They allow you to trade without being distracted by emotions by automatically entering, managing, and exiting positions. They can, for example, establish dynamic stop loss and take profit levels, dynamically trail your stop loss, draw Fibonacci levels and trend lines, interpret candlestick patterns, work with custom indicators and configure your money management - without you lifting a finger. Using an EA gives you the freedom to trade the markets while you are at work, asleep, or on vacation. An EA executes its programmed code without flaws, day in and day out without taking a break - 25/7 or 24/5 in the case of trading the Forex market. Strategies that would normally break a human being, due to their numb or even complex nature, become feasible. Next to fully automated trading systems, you can also create semi-automated systems using EAs to notify you when it's time to manually place a trade. Greenlight.

EAs can be bought from other programmers or you can build them yourself. When you decide to buy an EA, you are buying what we call a Black Box. A Black Box is a system in which you do not know the exact processes and rules. This is unsettling because with real money on the line you want to know exactly when and how an EA reacts. That is why we are going to teach you how to build EAs yourself! 

The KEY

Trading is like poker, if you know what type of hand you have, you can make calculated bets according to that hand, and the probability of success behind it. 

For example, you have AK suited, which is a good hand in almost all scenarios. It is wise to use a more aggressive way of betting if you do have this hand because it is very likely that you win most out of the hundred times you get this hand. For the less aggressive players, you might not increase your bets, but you won't fold instantly, right? By the way, I say a hundred times because the sample size is very important. On an individual basis you might lose this particular hand, maybe once, maybe twice or maybe 5 times in a row. This is called the random distribution of outcomes. 

There is one law that you should know about and that is the law of large numbers. In probability theory, the law of large numbers (LLN) is a theorem that describes the result of performing the same experiment a large number of times. According to the law, the average of the results obtained from a large number of trials should be close to the expected value and tends to become closer to the expected value as more trials are performed. In other words, you cannot judge a particular outcome of a hand or trade, you should only make a judgment if you have a larger sample size.

You might ask, Max how can I grow my capital, without losing it?

This question is pretty complicated, but these are the things you should do;

• Learn everything you can about this market
• Learn about finding a true edge, and how to exploit it
• Learn about reducing your emotional attachment to the market
• Study probability, risk models, reward models, and different trading styles
• Surround yourself with a group of like-minded individuals
• Work as hard as you can towards freedom in life

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