Automatated Computer-Implemented Stock Trading Algorithms?

[Frylock]

@RaftPeople

Edit: Actually, as I re-consider, it would assume people are not random, so if rational is synonomous with non-random then you are correct.

There are plenty of ways to be non-random which do not involve trying to take the most efficient means to one’s end. (I take it that’s about what Chronos meant by “rational”.)

[ultrafilter]

A rational person is one who acts to maximize their expected utility. In more informal terms, you can say that someone is rational if they always act in their own best interests, but if you state it that way, people tend not to understand the distinction between rationality and selfishness.

@Chronos

And at some point, the disparity in returns might suggest that a given lottery-ticket buyer’s method is better than just holding onto your dollar.

Show me a lottery where the last game conveys information about future games, and you might have a good analogy. In the meantime, I’ll direct you towards Lo & MacKinlay’s A Non-Random Walk Down Wall Street, a standard exposition of predictably in the stock market. It’s highly recommended for anyone who’s not afraid of a lot of math.

[Dog80]

There’s a guy in another forum I frequent who gets most of his income from trading in the stock market. He has tried these computer algorithms and he says they are mostly crap. For example they will tell you to buy back (at a loss) the stocks you just sold yesterday and stuff like that.

[pulykamell]

@ultrafilter

In the meantime, I’ll direct you towards Lo & MacKinlay’s A Non-Random Walk Down Wall Street, a standard exposition of predictably in the stock market. It’s highly recommended for anyone who’s not afraid of a lot of math.

I’m going to have to pick up that book sometime soon. I’ve read “Random Walk Down Wall Street,” and the thesis is very compelling, although I think Malkiel shrugs away behavioral finance a little too much. That said, his overall conclusion is convincing and looks well documented. I’ve wanted to find a decent counterargument for some time, and it looks like the book you recommend would offer this in much the same manner Malkiel lays his thesis out.

[ultrafilter]

@pulykamell

I’m going to have to pick up that book sometime soon. I’ve read “Random Walk Down Wall Street,” and the thesis is very compelling, although I think Malkiel shrugs away behavioral finance a little too much. That said, his overall conclusion is convincing and looks well documented. I’ve wanted to find a decent counterargument for some time, and it looks like the book you recommend would offer this in much the same manner Malkiel lays his thesis out.

I think it is interesting to note just how technical you have to get to refute the random walk hypothesis. Yeah, it’s false, but not in a way that a day trader or a charts guy will ever realize.

[pulykamell]

What does this mean practically? Does it mean that it is possible to “beat the system” in a way that will make money, or does it mean something more nuanced?

[drachillix]

@Dog80

There’s a guy in another forum I frequent who gets most of his income from trading in the stock market. He has tried these computer algorithms and he says they are mostly crap. For example they will tell you to buy back (at a loss) the stocks you just sold yesterday and stuff like that.

Sounds like s crummy algorithm. I would imagine especially if you were to stick to a handful of stocks it would be pretty easy to map historical highs and lows, along with the current average price paid per share. Program can be set to sell X amount per day/hour/whatever if prices exceed X amount over average or buy at X below average.

[China_Guy]

algo trading isn’t really for stock picking. It’s for scanning a huge amount of different instruments to find an arbitrage opportunity. And then execute on that arbitrage.

[iamthewalrus_3]

@Chronos

There’s still the possibility that genuine skill at playing the market does exist; it’s just that if it does exist, then it can’t be recognized, because if it could be recognized that, say, Scrooge McDuck is good at playing the market, then a good, intelligible strategy would be “Buy the same stocks that Scrooge is buying”.

The problem is that trying to outperform the indexes is a zero-sum game: For every dollar more than average that someone makes, someone else has to lose a dollar relative to the average. But if someone had a good, intelligible strategy (or an unintelligible strategy that is recognizable as good), then soon everyone would be using it. But if the strategy is actually good, then that would mean that everyone is outperforming the indexes, which is impossible.

You’re overlooking the substantial first-mover advantage that can come from having a good (secret) algorithm. If the “best” strategy is to do the same thing that Scrooge does, Scrooge will still get better prices because the rest of the market has to wait to see what he does before they can do it. Of course, if the market really did just copy him, he could get fabulously wealthy just by manipulating the market, thus driving the “copy Scrooge” strategy into the ground. So the equilibrium state is that, even if the market knows that Scrooge is brilliant, they can’t profitably copy him after the fact. This maintains the constraint that trades are zero sum, but allows for the existence of a strategy that’s better than average.

So it’s quite possible for there to be intelligible strategies that beat the indices, provided that the strategy is not known to all, or, even if it is known, if you can somehow implement it faster than the other participants.

[HorseloverFat]

>Do people ever let computer programs figure out what to buy and what to sell on the stock market?

I once interviewed for a job at a day trading firm as 4 or 5 years ago. I asked the interviewer this question. He told me they use software but only to suggest or to perform automated actions. He told me he could watch sales of stocks and tell if someone is using AI because it does certain actions characteristically and supposedly they could use that to their advantage.

So its an interesting man vs machine scenario. It looks like the humans are pretty good at hacking the algorithm, thus the reflectance to leave it on autopilot.

That said, it might be smarter to use it for long-term investing, but in the world of day trading it doesnt seem to help too much.

[muttrox]

@MeDrewNotYou

According to Nate Silver, investing on the day after a fall is slightly to your advantage.

Quote:
Originally Posted by Nate Silver
Since 2000, the market has gained ground just 47.7 percent of the time following a prior day’s gain – but 54.2 percent of the time following a loss.

So after the Dow falls, for example, you’d buy up its exchange-traded fund, the DIA. I’m no expert, but I assume one would want to put a lot more work into their portfolio. And since the disparity seems to be dependent on how information moves, it probably won’t stay this way forever.

Your conclusion isn’t founded. Nate didn’t say anything about the magnitude of change. Imagine every time the market went up after a loss it went up by 1%, but every time it went down after a loss it went down 10%. Even if went up after a loss 80% of the time, it would still be a losing proposition. Without this information, you can’t claim the strategy is to your advantage.

(Hey anyone - How do I keep the nested quote in there?)