<aside> 🤖 Automated trading can feel intimidating. It ought to be — frequently trading could cause fast losses. Nevertheless, it’s our belief that technology can make the knowledge of trading communities directly usable to everyone.

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The Edge: Thin Profit at Large Scale

Thin profit is 1 or 2% realized gains per trade, not 5, 10, or 20% that a human trader would often aim for. Why thin profit? Because it’s more likely to be a profit at all (as opposed to a loss) — after entering a position, it’s much more likely to have 1% profit hit than 20% in the near future, if ever.

Computers have this edge over humans because

• Its time is worthless compared to human’s, it can wait however long it takes
• It’s tireless, always ready for the next opportunity at any time
• It has no greed/fear emotions and simply follows rules
• It’s multi-tasking, can do multiple directions/stocks/strategies at the same time

Take for example a stock chart with trades under the “Buy the Dip” strategy.

“Dip” means the price drastically dropped compared with recent norm. On May 18th there was a drastic drop, so we entered a long position. The “dip” may not be the true bottom, i.e. the price can drop further after. In fact before the take profit sell on May 26th, most of the time the position was underwater.

Why computers have a higher chance to realize this profit than we humans? This is what often happens to us:

• During the lengthy underwater period, we fear that the price can drop further, we want to close the position so we don’t lose more money
• On May 26 when we are finally above water, we may not close the position because
  • We fear there is additional profit we are going to miss out
  • Waiting 8 days for this 1% profit from a small portion of our portfolio is not worth our time
  • If we take the profit, we’ll have to find something else to do with that cash, it’s exhausting
  • We were busy with something else and didn’t notice it
• Now if we didn’t close the position by June 9, it would have dropped all the way down, and who knows when will it come back up again

<aside> 👉 Computers can afford to wait hours to weeks for thin profit, with no emotions. It scales by doing that many times, on many stocks at the same time, all the time.

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Strategy Styles

There are generally two strategy styles — Mean Reversion and Trend following.