Two Moves Left for Greece & Algorithmic Trading Systems

This week is sure to be full of tension and market volatility for Algorithmic Trading Systems.  With only two moves left for Greece, a deal or the dreaded “Grexit”, this is playing out like a game of Chess where one opponent, with many pieces, chases the other opponent, with only the King, around the board till an ultimate Checkmate is established.  We all know the outcome is so heavily one-sided, yet we can’t help but watch as it plays out.

As traders, we have to consider how this volatility and uncertainty plays into our abilities to profit from market moves and the inherent risks that are now present for all of us.  The first thing that comes to mind is “sniper mode”.  This is a change in execution and deployment of trading resources so that every opportunity is weighed against 2 or 3 times the standard risk factors.

Within my studies of market theory and trading concepts over the years, one statement comes to mind from the “Sakata’s Rules”.  Roughly translated, the statement read “When trading, the most common action is to not trade (roughly 60% of the time)”.  Identified over 400 years ago by the legendary Mr. Homna, this statement is as true today as it was in Japan then.

As a trader, we adopt many roles.  Of these roles, I suggest to all my clients the following A-B-C process that summarizes my activities as a trader.  The concept herein is that we, as traders, attempt to balance the roles of each of these statements in an attempt to become successful.

  • Protect Equity
  • Limit/Contain Risk
  • Generate Profits

In an environment like we currently have in the global financial markets, one must learn to adapt strategies to balance the functions of professional investing.  There are often times when it may be prudent to be more aggressive and yet other times when being extremely conservative is prudent.  With the automated trading systems, this is handled internally by quantifying price volatility, price rotation and varying degrees of risk with regards to the algo trading system.

As stated above, the objective is to properly balance the three components of professional trading system managers, Protecting Equity while Limiting/Containing Risk in an attempt to Generate Profits.  This is often a difficult task for many and sometimes any trader, or trading system, will take an opportunity for success that results in a loss.  Recently, the algo trading system has experienced a few minor losses throughout the price rotation earlier this year.

As this automated trading system continues to quantify risk in an attempt to generate profits, the opportunities for success become more restrictive within extreme price congestion.  Eventually, when the market exits this congestion, the quantifying measures will loosen up a bit and allow more trades.

In conclusion, the current environment in the global markets, including Greece, China, Russia and others, presents a very volatile and dangerous environment for traders in general; especially Algorithmic Trading Systems.  Extreme volatility is likely driving professional traders bonkers.

Patience is the key to success in times like this.  Preservation of capital and containment of risk are paramount.  As Greek negotiations unfold and other global financial issues play out, the trading systems will quantify a new level of risk allocation and likely become a bit more aggressive in nature.  Until that time, be thankful the trading systems have these advanced risk management features and have kept us out of much of this volatility.  I’m sure we will see most professionally managed funds experiencing horrible returns because of this price volatility.

Good Trading,
Chris Vermeulen