In the past few years, hedge funds, quants, asset managers (CTAs & CPOs), proprietary trading groups and institutions are moving into automating their strategies by the use of automated futures-trading systems.
So, what exactly is that?
Back in the pre-Windows and pre-Internet days, futures are traded in the pits. The first time you visit the trading floor, it can be quite messy, seeing pit-traders shouting and using strange hand signals. It is like a secret language that is common to the insiders.
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Fast forward to present day, with the improvements in the computers with greater processing power and connectivity, pit-trading is being phased out. Numerous futures brokerages have sprung out and they provide futures accounts that are able to place transactions directly with the futures exchanges. You can say that pit-trading has moved out of the pits and right into any place that has a moderate speed internet connection and a computer.
There are enormous financial opportunities right now. It just requires $5,000 or less to open a futures trading account with any futures brokerages. Whereas, a pit-trader used to need at least $100k to buy his place in the pits for a year.
The futures brokerages go a step further by providing the capability of connecting a computer program to a futures account or providing what is known as Automated Futures Trading.
When a human trades the futures markets, he looks at the price charts, identify trends, analyze data, and then calculate their risk and reward. All these actions can be programmed into the computer and be executed automatically.
Many advantages exist in automated trading. It eliminates human errors, removes emotional responses to the market movements, increases opportunities by scanning as many futures markets as possible, such as bonds, currencies, indexes, and commodities, in a split second and places transactions in the next. This is much faster, and more accurate than a human being.
To ensure performance consistency and reliability, the automated system is back tested with historical price data, simulating thousands of transactions, executed in bull and bear markets, spanning over many years. With such a rigorous testing, only the best and profitable automated systems survived and are put into live trading with real money.