Based on the experience gained, I will try to answer the question – how to get a stable income from trading? Or a little differently: can exchange trading become the main source of income? As my regular readers know, I am mainly engaged in high-frequency trading, therefore, further considerations reflect my opinion solely from the point of view of active trading.
First, you need to accept the basic principles that are axiomatic for me:
- The future is impossible to predict. I consider this a fundamental property of our reality. Hence, if you are trying to predict future events on the basis of past events, then this is a futile exercise. When applied to trading, this means that any conclusions based, for example, on the prices of past transactions (that is, according to the historical price chart) have no practical value. Accordingly, technical analysis does not work from the word at all. Why, then, is there a period in the history of trading when people have been making money on all these pointless indicators for years? I’ll try to answer below.
- Future events can be put into several significant (in terms of impact on profit) outcomes, each of which has a certain statistical probability. Is there a contradiction here with the previous point? In this case, we are not trying to predict something, but clearly define the probabilities and plan our actions in accordance with their magnitude. The problem here is that it is rather difficult to calculate these quantities, due to the fact that there is the influence of many factors that must be taken into account in determining the probabilities. The number of these factors is constantly growing with the growing popularity of trading, with the acceleration of technical progress, the emergence of new instruments, etc.
- The correct calculation of the probabilities of outcomes is possible only for short periods of time. This conclusion follows from simple logic – the longer the computation time horizon, the more factors need to be taken into account. For example, news events undoubtedly have a strong impact on the balance of supply and demand in the market. And it is rather difficult to take them into account in mathematical formulas due to the random nature of this factor itself. However, over a time interval of, say, 5 minutes, this effect by orders of magnitude is less than over an interval of 24 hours.
These principles are nothing new; in general, these are the foundations of the theory of probability. Nevertheless, for some reason, many traders stubbornly ignore this theory, and, judging by the posts and comments on well-known resources, they are mainly engaged in gambling, not trading.
In the 70s – 80s in the USA, in the 90s in Russia, the participants quite successfully made money on the market using technical analysis, for the simple reason that the factors that had a significant impact on the market were several times less than now (including because of the smaller number of counterparties). And technical analysis indicators more or less reflected the statistical dependencies that existed in historical prices, volumes, etc. It is now evident that these sources are insufficient. Although even now you can find periods in the market where some technical indicators seem to give correct “predictions”. But such periods are of ever shorter duration, and, undoubtedly, in the long term, trading according to technical analysis will be random with negative profitability (due to commission and slippage).
So, for profitable trading, it is necessary to correctly apply the theory of probability over short periods of time. If the calculations are correct, then the profitability of your strategies will be several times, or even tens of times higher than traditional investment strategies and positional trading. And the quality of equity will be orders of magnitude better. As an example, in the title of the article, I cite a graph of the daily profit of one copy of our strategy that works in Western markets (black line – test, red – real). The daily yield here is about 50%! And here the number of profitable trades is 53%, unprofitable (together with zero) – 47%, the ratio of average profit to average loss is 1.05. That is, with such a seemingly insignificant advantage in calculating probabilities, the result turns out to be very significant – the effect of a large number of transactions, that is, a sufficient statistical sample even within one day.
Unfortunately, it will not work to top the Forbes list, even with such a yield, since there are significant limitations. First, all active, and especially high-frequency, strategies do not allow the use of large capital due to the limited instant liquidity on the exchanges. We have to develop all the new tricks in order to somehow increase the percentage of capital use. Secondly, due to the requirement for a quick reaction to market events, the software is quite complex and needs constant adjustment to changing technologies. Third, competition is constantly growing, which entails a steady decline in the profitability of algorithms. Therefore, we need continuous development of strategies and the search for new markets and instruments around the world.
And to ensure all of the above conditions, trading cannot be a hobby that you turn to only from time to time. Trading should be your job, and it is likely to be one of the most difficult jobs you will ever do. Therefore, an obligatory rule is that you should really like it. And in this case, trading will bring a stable income, as we have been for several years.