Autonomous agents and genetic algorithms…oh my!

Input = binary.  Output = $$.  Source: Google Images.

Input = binary. Output = $$. Source: Google Images.

The latest book I’m reading is Professional Automated Trading: Theory and Practice by Eugene Durenard.  I’m about a quarter through; in the words of my dad, it’s way cool.

The book has that certain exoticism which probably appeals to a wide range of financial geeks: lots of mentions of hard sciences; passionate disregard of prevailing ‘rule of thumb’ approaches to valuation and trading; and the creation of a robot-army, led by a robot general, to achieve trading success in a landscape filled with chaos and complexity.  If this gets your interest piqued, I suggest purchasing a copy.

OK, back to Earth for a second.  Having not read the full book yet (but the early summaries give a pretty comprehensive overview of what’s to come), I wonder how much of the theory can and does get put into practice.  From the veneered description above, I clearly want to believe the secret to endless trading profits is a fantastically-engineered army of automatons.  However, it’s been my experience from reading more practical trading literature, as well as working in various trading shops, that higher complexity = higher disappointment.  The development cycle I’m accustomed to runs a bit like:

  1. I test a basic hypothesis, such as ‘the oil price trends’.
  2. I come up with a trading rule, having verified #1.  Perhaps a basic breakout strategy.
  3. The basic strategy in #2 looks OK-ish, but I notice a few really bad apples among the backtested trades.  So I create a filter rule to ensure trades like them don’t happen.
  4. I test #3 with the same data.  Perfect.  So now I test out-of-sample data.  Guess what? #3 stinks compared with #2.
  5. Repeat #3 and #4 until I finally give up trying to find a filter rule, and stick with #2.

The idea of continuously-evolving trading robots, or a static robot army led by a continuously-evolving general, sounds a bit like an in-line version of the above sequence.  Maybe, after enough trials, the robot general will beat my logic and analysis – I’m open-minded.  Perhaps that’s why I’m keeping with the book.

In sum: the financial markets offer numerous ways to get very complicated and technical.  Sadly for yours truly, I haven’t yet found a complex ‘golden nugget’ strategy which consistently outperforms more simple trading implementations.  But I keep searching…

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