This week I finally realized that my computer trades better than I. I’ve had this running argument with my friend Rob Booker for more than a decade about the advantages of algo versus prop trading and like Don Quixote tilting at windmills I insisted that human judgment was always crucial to the markets.
This week I finally had to concede that I am wrong. It’s not that algo trading is much faster, much less error-prone, much more focused than the human mind and eye. It’s all those things of course. Algo trading does something that I certainly can’t — it provides consistency.
Lately, I’ve been following James Clear, the author of Atomic Habits, on Twitter and is recent tweet really opened up my eyes. Clear wrote, “You have to STANDARDIZE a habit before you OPTIMIZE a habit.” This seems so obvious to us yet think how hard it is for human beings to standardize on anything for long. Hell, I am one of the most habituated people I know and even I am getting tired of eating carrots every day.
Not so with algos. Algos will be happy to take the exact same setup the exact same way over and over and over again. Algorithms provide standardization even if you can’t. That’s extremely important because you and I know that as human beings we drift. The essence of our nature is to experiment, to seek new things to always deviate from the norm. That’s our greatest advantage as a species, but it’s also our biggest curse in trading.
Now when I say my computer trades better than I, what I mean is that I made my computer trade better than I. By standardizing its entry and exit process I could intelligently assess strategy performance and then optimize the settings. Computers don’t think — they execute. The thinking part is still up to us. That’s why you don’t run a 5-minute algo in front of NFPs. That’s why you shut down scalping algo during roll when spreads could be wider than your stop. Human judgment is still crucial but on a broader assessment of risks rather than on individual trades.
After watching my trend algos beat me on the 1-hour chart, on the 5-minute chart and even on the 1 minutes chart I have finally made peace with the machines. I let them do their thing and I don’t even get mad when they bombard me with a series of stop outs. Instead I calmly asses why and then I determine if I can do anything to improve it. This ceaseless process of execution, standardization and optimization — all done under real market conditions with real money is the only way I have been able to achieve consistency in my trades and those of you who have been watching my daily videos on twitter must have noticed.
But valuables as algo trading has been, I have fully relinquished control of the screen to my MT4 robots. I’ve accepted that my trend structure is undeniably more efficient and profitable when traded on an algorithmic basis. But I still go toe to toe with the market when it comes to counter trend plays. Ironically enough my fade trades have become better and more consistent precisely because I’ve relinquished control over trend setups. By freeing my mind, the machines have done what machines have always done thought civilization — they have freed me to pursue higher level more creative tasks.