REVIEW: Algorithmic Trading: The Play-at-Home Version

“His creation wasn’t a new mobile app or e-commerce store. It was a computer program that would buy and sell currencies 24 hours a day, five days a week.”

What is the worst that could happen, right? This is an article on how “Do It Yourself” traders have taken it up a notch by creating their own algorithmic trading program (another phrase for “data mining” for results after the fact). Apparently there are Youtube videos, highly attended courses, and trading platforms that eagerly provide the support to these home-brewed traders (for a small fee). Below is a picture of the gentleman named in the article. It’s as if trading stocks should be as common as spending some good ol’ fashioned quality time with your kids while tethered to your laptop.

Algorithmic TradingWhile this may make for an interesting story, this practice is ultimately setting this father up for failure. While this trader may have as much if not more intellectual capacity as someone standing on an institutional trading floor, it’s unlikely this individual needs to trade currencies 24 hours a day and five days a week. Not to say that professional traders would be successful either – their track record speaks to my lack of support.

In fact, successful investing should be as interesting as watching grass grow or paint dry. This, however, runs in contrast to how successful individual investors are portrayed in the media. Below are some depictions of all you really need to be a successful investor… bare feet, a sleek desk, and a really pensive look.
 

Algorithmic Trading Algorithmic Trading Algorithmic Trading

Trading in and out of stocks is anathema to a successful investment experience. Extensive studies have indicated the following trading characteristics of active individual investors and the challenges they face:*

  • Hold stocks for less than two years
  • Trading frequency was greater in taxable accounts
  • An investor who averages a 24-month holding period will have to outperform the market on a pre-tax basis by over 1.1% just to stay even.
  • On a risk-adjusted basis, the average household annually underperformed by about 3.7%
  • The 20% of the households that traded more frequently annually underperformed the market by over 5.5%.
  • On a risk-adjusted basis, the frequent traders annually underperformed the market by over 10%!

*Barber, Brad M., Terrance Odean. “Are Individual Investors Tax Savvy?” Evidence from retail and discount brokerage accounts.” Journal of Public Economics, 2003.

Susko, Peter M. “Turnover and After Tax Rates.” Journal of Wealth Management, Winter 2003.

These articles do a disservice to the consumer investment community because they provide the impression that success is just a matter of having the right equipment. That is the furthest thing from the truth. Investment success requires the ability to know why you’re investing (e.g., achievement of a long term financial goal), selecting an appropriate risk adjusted portfolio that gives you the best chance of success, and the discipline to stick to the plan.

 

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