Common Mistakes in Quantified Trading (Quantitative Trading): Trading Pitfalls and Errors

Automated trading has an almost endless list of issues that can turn your trading into a disaster. For automated traders, you face another issue in addition to the technicalities of trading: screw-ups with software and programs.

Automated trading has many advantages, but the main advantage is the potential mistake of the program sending many wrong orders. It can happen, unfortunately.

Thus, trading is about avoiding mistakes. How do you avoid mistakes? The most important thing is to run a checklist every day. Airline pilots “invented” the checklist almost 100 years ago – something that has made flying an extremely safe means of transportation. You can make your trading just as safe by implementing checklist procedures.

Table of contents:

Trading involves anticipating the unexpected

Randomness is a big part of trading. The loopholes in the development process are many: underestimating commissions and slippage, curve fitting, and survivorship bias are elements many ignore or underestimate. Creating, building, and developing strategies is no easy task, and you are not out of the woods when you believe you have found a tradeable strategy.

What you do when you are trading an automated strategy live is just as important. Unfortunately, a lot of things can go wrong:

Trading is all about avoiding costly mistakes

I’m mostly an automated trader. This gives me opportunities to trade and diversify easily. But with automation comes a risk if something goes wrong.

Chapter 4 in Victor Niederhoffer’s book Education Of A Speculator starts like this:

There are so many ways to lose, but so few ways to win. Perhaps the best way to achieve victory is to master all the rules for disaster and then concentrate on avoiding them.

Some days ago I wrote about my trading day and my procedures. For me, it’s extremely important to do everything in the correct order/procedure. This is to avoid costly mistakes.

Do you remember Knight Trading? They updated their robot and forgot to test it. Too bad for them, the program went crazy and sent a lot of erroneous sell orders. They pushed prices down and they didn’t manage to stop until they had lost about 500 million USD. This created a lot of prey for individual day traders like me. It was a very good day. Unless, of course, you’re not the one being preyed upon!

Automated and quantified trading requires procedures and checklists

With automation, it’s extremely important to do things in the correct order and to make sure all programs are set correctly before the market opens.

To avoid mistakes I need to follow my procedures, just like airline pilots. There is a reason why pilots need to follow every procedure: one mistake can lead to a crash. Pilots have checklists, something both traders and investors should have:

Atul Gawande – The Checklist Manifesto

It’s the same with automation. One mistake