Can a Retail Trader Succeed at Algorithmic Trading? (Part 6)

Today I will continue with presentation and commentary in an algorithmic trading thread that took place on a popular online forum about 18 months ago.

I believe flippant replies like the following are of little use with their absolute, elitist, and hollow claims:

     > The basic fact of the matter: if you love problem solving, the market is just
     > an other [sic] puzzle, and you can have as much money as you want.
     >
     > Its [sic] not in the numbers or indicators, its [sic] the edge around which you
     > design the trading system.
     >
     > Running tests won’t give you the edge, spend time finding your edge [sic:
     > comma splice, John Rubadeau].
     >
     > Thats the core of your system, manual or automated [sic, sic, sic].

I often find such replies to be sorely in need of proofreading, too.

In total contrast, I think the following reply sounds very educated and even brilliant in places:

     > So I think it’s possible for pretty much anyone to make money using
     > simple systematic trading strategies. Most of this money comes from
     > being exposed to diversified sources of risk, so no ‘secret sauce’
     > or fancy ML techniques are needed. These strategies will mostly be
     > quite slow in nature, so not HFT. They will be based on sources of
     > risk premia that decay very slowly, if at all. They will not be high
     > Sharpe Ratio, but by diversifying over a large number of uncorrelated
     > instruments and a number of different strategies I think an expected
     > SR of 1.0 is feasible.

Based on my limited research, I don’t know if I agree with this. I’ve looked at roughly 300 simple strategies on three different markets and none came close to passing the KD criteria although I do believe these criteria to be stringent (probably requiring better than SR of 1.0). Could I trade some of these markets during uncorrelated times (I don’t think it makes as much sense to speak of “uncorrelated markets” because correlation changes) and get an overall SR of 1.0? I would regard this as pretty good because my testing shows SR for the S&P 500 to be around 0.35.

     > Does this count as success? A SR of 1.0 achieved over ten years or
     > more would be top quartile for nearly every hedge fund category.
     > But you will struggle to make a living as a trader with a SR of 1.0,
     > if trading is your only source of income, unless you are very
     > well-capitalized (equates to lower risk and return target).

This is very interesting and theoretical. I would need to backtest and try and correlate SR with annualized return, drawdown, and then figure out reasonable position sizing to determine whether profits could exceed annual living expenses.

I will conclude next time.