Algo Trading

Automated trading, tailor-made to your expectations, in order to be serene on financial markets.

Algorithmic trading, trading robot, trading automatons, the terms vary and the reality is the same.

Accuracy of the approach

The private trader is usually alone. Alone in front of his screens, he can choose between two ways of trading.
The first consists of observing the markets and, based on his knowledge of them and technical analysis, searching for trading opportunities "in real time". This is discretionary trading.
The second is to develop a “method” sequence of repetitive operations, a process. In the 70s and 80s of the previous century. This method can be implemented manually or automatically, to a greater or lesser extent. When the whole process is automated, we talk about program-trading, robot trading or Expert Advisor for the MT4 platform. Whatever the terms, the important thing for a private trader is to know why automate this or that part of the process and which part to keep manually.

Why automate?

Let's just consider the disadvantages of the manual process.

While a few private traders achieve excellent performance without the help of any tools other than good quality graphics software and a "clean" data flow, there are few of them and they should not be taken as examples. It would be as inefficient as asking a sports teacher to take you to the level of the world's number one!

They willingly acknowledge themselves the dangers of the manual process :

• Poor physical fitness, health problems, unusual tiredness

• Various computer bugs

• Overconfidence due to extraordinary gains

• Lack of confidence after several consecutive losses

• Influence of the ambient media

• Arguments with close relatives

The list is long and never complete of the causes of disruption of the "manual" private trader.

Many private traders have also developed tools such as personal indicators. Many also try to automate a complete process, keeping the sending of orders to the market manual. Fewer are those who seek complete automation because it is obvious, even before analyzing the automation that many difficulties will occur.

Gravity Market offers the creation of trading robots and develops trading algorithms which are the result of a long research phase. We manage a large database thanks to formatting, which allows us to make a very large number of structured observations on a strategy developed according to your expectations. Once set up, your strategy is back-tested over several years of historical prices.

The Gravity Market team can then improve this strategy in order to improve the results at the client's request: This strategy is optimized in order to give the best accessible risk/return ratio but also to speed up the whole analysis process in order to save time. The robot can then be launched on all markets for which it has been developed and made available on your MT4 platform by the Gravity Market team.

MetaTrader Expert Advisors can be used to automatically manage all aspects of a trading operation such as sending orders directly to the server. This provides Gravity Market clients with reliability, efficiency, time saving and above all peace of mind: MetaTrader Expert Advisors can be used to automatically manage all aspects of a trading operation, such as sending orders directly to the server : 

Reliability : The algorithms used are back-tested: Each strategy is tested and the back-testing tool provides valuable statistics. The more stable they are, the more serene we are with respect to the market, because our risk control is objective. In addition to the automation of market orders, this helps to reduce the stress of taking positions at discretion in the face of market developments.

Time saving : A robot is active 24 hours a day, it is impossible for a trader. You will no longer miss any signals.

Efficiency : The application of algorithms generates a serene atmosphere for your actions on the financial markets. Indeed, the automation of orders on the financial markets has multiple advantages: no more approximate trades, no more quickly-closed trades, no more losing trades left without stop loss in the hope of returning to break even (zero point), less stress and more opportunities.

Why format ?

Formatting is essential to perform tests on the markets. It consists in recovering data from different data providers and assembling it in order to obtain an accurate, dense database that will highlight gaps or errors. This last point is carried out using a correlation model and will therefore make it possible to provide a complete database free of misquotes in order to back-test the algorithms on the markets in the most accurate conditions possible.

Why back-testing?

Let's start by translating this term to remove its mysterious and opaque aspects. Back-testing is the back-testing of trades according to a set of decision rules.

Using the most complete and cleanest price histories, all stages of the back-tested trading process are experienced and the results measured and stored in a computer system, then analysed.

Firstly, the IT tools used to conduct back-testing can vary in complexity: Back-testing can be carried out using spreadsheets or consumer trading platforms that include a back-testing module, but also use a dedicated software that is very complex and expensive. Gravity Market has its own back-testing software.

The quality of the back-test is based on its transparency, on the respect of the process and on the quality of its computerization. All this is schematic because, in the first place, everything depends on the process.

It should be noted that the quality of the back-test requires a team with experience in multiple fields; market finance, technical analysis, IT, statistics. The pitfalls are multiple and the result will live up to expectations requiring in-depth work.

The power of a well conducted back-test will bring results that must be listed :

  • Rejection of bad "good ideas"
  • Rejection of conditions unsuitable for the process
  • Rejection of erroneous earnings expectations (a system can be good but less than we thought)
  • Better perception of the risks inherent in a process,
  • Better perception of the correct ranges for each process parameter,
  • Better market perception adapted to such a process
  • Better perception of the variables monitored throughout the trading process

Analysis

Once a minimum of 1000 back-tests have been launched, Gravity Market analyzes some of the following ratios to determine if the results are stable and conclusive :

Volatility

Volatility measures the magnitudes of changes in the price of a financial asset :

• The higher the volatility of an asset, the riskier the investment. The expectation of gain or loss is also higher.

• The lower the volatility of an asset, the safer the investment. The gain expectation is almost certain but remains low as with government bonds.

 

Volatility concerns all horizons (short, medium and long term) and does not care about the direction of the movement: only the amplitude of the movements is taken into account.

There are 2 types of volatility, historical volatility and implied volatility :

• Historical volatility which is based on the historical variations of a security over a defined period. It is limited to predict future variations. This volatility is determined by the standard deviation whose formula is as follows :

Where : -   the average of the variations

• V the variance

• xi the change in the price at time i

• n the total number of time periods

• The implied volatility corresponds to the price of the risk of an option. It represents the volatility expected by market participants over the life of the option. Thus, the higher the implied volatility, the higher the option premium and vice versa. Implied volatility is determined by the option price, its maturity and the level of the risk-free rate. Its calculation is based on the Black & Scholes model.

Recovery time

When the portfolio reaches a certain value and then begins to lose money, the recovery time is the period between the start of the losses and the return to previous high value.

The recovery time gives the investor an estimate of the maximum length of time over which his or her portfolio can fall in value. 

The drawdown

The drawdown measures the loss and thus the risk of a trading strategy. The maximum drawdown over a period of time is the maximum loss incurred by a trading strategy over this period. It can be calculated as an amount or a percentage. The drawdown is fixed and can only increase over time for an unchanged strategy and therefore measures the risk of the strategy.

However, past performance is not a prediction of future performance.

The success rate

The success rate is the number of trades with profit in relation to the total number of trades. It is a good indicator for a strategy but it is very important to associate it with other indicators. Indeed, it is not because there are more winning trades that they make a profit in total.

The average gain and the average loss

The average gain and the average loss are expectations that allow us to determine the famous R3 gain/loss ratio that is reused in many ratios and that allows us to observe whether our strategy is effective or not. This ratio is for example used for the iso-K curve or Kelly's formula. 

The iso-K curve

This ratio makes it possible to observe the impact of costs and profitability per number of trades.

Kelly's formula

Kelly's formula is used to determine the percentage of capital that an investor should allocate to each of the securities in his portfolio. The formula is as follows :

Kelly % = W – (1-W)/R

With :

Kelly % = % of the capital to be invested in the stock
W = Probability of making a gain
R = Gain/loss ratio

The number of trades

The number of trades made is an important indicator because if this number is too low, it is difficult to draw reliable conclusions.

For example for 10 trades with 5 winners and 5 losers, we are at 50% of winning trades but if we add one winner we are at 55% of winning trades.

For 1000 trades, if we add a winner, we would go to only 50.05% winning trades. We must therefore be careful to use a large number of trades before producing reliable and stable statistics, hence the realization of 1000 back-tests.

The lag

The lag makes possible to calculate the risk of the depth of the order book and thus the market liquidity risk.

When a large number of lots have to be bought, it is rare to be able to obtain all of them at the desired price. The time frame is therefore shifted according to the size of the lot according to the strategy and a weighted average of the volume of the lot is calculated. This allows us to obtain a portfolio curve that takes the lags into account and to compare it to a second purely theoretical curve that does not take the lag into account. Fees are included and increased in both curves in order to take into account non-materializable market parameters.

The objective here is that the correlation between the two curves should be close to 1 even if the returns are different.

The Sharpe ratio

The Sharpe ratio is a measure of the profitability of a portfolio in relation to the risk taken. The use of this ratio assumes that average returns are not sufficient to provide an accurate measure of performance.

Formulated in another way, it also makes it possible to calculate the performance of an investment in relation to that of a risk-free investment.

The objective of this ratio is to eventually build a portfolio with the lowest possible rate of risk. Its application is based on the following assumptions :

• A single risky portfolio can only be compared to a single risk-free portfolio at a time.

• The investor is risk averse.

• Returns in the mean-variance framework are distributed according to the normal distribution.

Improving the strategy

Once the analysis of the statistics for a strategy is completed, it is possible, at the request of our clients, that our traders try to improve it.

Implementation of the strategy developed

Once the developed strategy is ready to be used, Gravity Market creates a PAMM account for the customer and the customer can directly invest on the created strategy.

Note :

• Trading algorithm order placement fees will be determined according to the amount of the client's investment. (Same fees as for Gravity Market account types)

• The strategy can be designed by the client and then created by Gravity Market or developed entirely by Gravity Market.

Any code developed by Gravity Market is the intellectual property of Gravity Market. However, the client can still purchase his trading algorithm. For any further information, please contact Gravity Market at contact@gravity-market.com

Format



Formatting is essential to back-test algorithms on markets in the most accurate conditions possible.

Back testing



Gravity Market has its own back-testing software.

Analyze



Gravity Market analyzes certain ratios to determine whether results are stable and robust in the face of different market conditions.

en_USEN
fr_FRFR en_USEN