When Stock traders are confronted with the same set of circumstances over and over they tend to find the best answer and apply it over and over again. Their response becomes automated. As computers became faster and programming became better automated stock trading programs came into being. But do stock trading programs work to make money and avoid losses? Investopedia writes about the basics of algorithmic trading.
An algorithm is a specific set of clearly defined instructions aimed to carry out a task or process.
Algorithmic trading (automated trading, black-box trading, or simply algo-trading) is the process of using computers programmed to follow a defined set of instructions for placing a trade in order to generate profits at a speed and frequency that is impossible for a human trader. The defined sets of rules are based on timing, price, quantity or any mathematical model. Apart from profit opportunities for the trader, algo-trading makes markets more liquid and makes trading more systematic by ruling out emotional human impacts on trading activities.
The reader will note that nothing is said about this approach being more profitable. The old expression, garbage in-garbage out, comes to mind. If your programming is on the money then you will make money and if not you will lose and do so at a faster pace than if you had placed orders manually. Also algorithmic trading is typically applied to situations where speed is important. A stock starts to move due to either fundamental or technical factors and those who get into the trade first will profit and later entrants will not. But how does this work for activities like swing trading?
Do Stock Trading Programs Work for Swing Trading?
A couple of years ago we wrote about swing trading Chinese stocks when that market was in an uproar with historic gains followed by historic losses.
Many investors have poured money into China. It has a cheap labor force, although wages are going up. And it has a huge internal market. But, China also has lots of problems like the political unrest and pro-democracy demonstrations in Hong Kong. Our opinion is that swing trading Chinese stocks can be more profitable than investing in them.
Predicting where the Chinese economy will go and how its stock markets will respond is an art all in and of itself. A problem with Chinese stocks is the lack of transparency in their markets and financial system in general and then there is the ham-handed response of regulator to the market. The sort of fast moving and fluid market seen in the USA does not exist in China making an algorithmic approach dangerous for traders. On the other hand one can see the Chinese economy slowing and make intelligent assumptions about how various stocks will respond. In our article about trading a Chinese economic slowdown we noted
The Chinese economy has grown dramatically for four decades, commonly in double digits year after year. This grown has been based on investment in industrial production, a weak currency and affluent buyers in North America and Europe. Now, as Europe struggles to get back on its feet and the USA is slowly recovering the markets for Chinese goods is not keeping up with the pace of Chinese factory building. China needs to convert from an export driven economy to one driven by internal markets. And they need to quit lending money for more and more construction of factories that are not productive and whole cities that are virtually empty.
Our belief is that stock trading program may work for some approach in US markets that require first-in response for profits but they are not applicable in foreign markets like China where a solid grasp of fundamentals is more important to profits in swing trading.
