What are Automated Futures Trading Systems?

Often referred to as algorithmic trading systems, or simply algos, an automated futures trading system is a defined set of technical rules and parameters that ultimately determine entry and exit points for a given contract.  In the event that all of the stipulated technical events occur, a buy or sell signal is created and a trade is automatically executed without human intervention.   Simply put, it is trading on autopilot.

Each system is comprised of specific ingredients and circumstances, but they most commonly involve moving averages, stochastics and other computer-generated oscillators.  However, along with technical indicators many of “the computers”, as they call them, are trained to scour the news headlines for key words which are then incorporated into the “buy” or “sell” triggers.

As you can imagine, the results are highly dependent on how well the rules perform in various market conditions.  Accordingly, system developers spend an incredible amount of time optimizing the system to manage risk and increase the odds of profitable results in any environment.  With that said, market conditions are always changing, so finding a system that works in yesterday’s markets according to back-testing, doesn’t guarantee they will work in today’s markets.  As is the case with any trading venture, there are never any guarantees.

Why use a Trading System?

1.       Eliminate Emotion – A majority of unsuccessful traders are the victim of fear and greed.  An automatic trading system reduces the impact of human emotion.

2.       Time Saving – System traders can comfortably carry on a normal life (have a day job and or the freedom to step away from the computer during market hours).  Trading rules are pre-determined and execution is automatic, whether you are watching or not.

3.       Convenience – Let others do the work for you.  Once a particular system is created, or subscribed to, and implemented, the trading account is on auto-pilot.  The only obligation is to keep an eye on the statements at the end of each day to ensure satisfaction with the results.

4.       Like Markets, Systems can be “Traded” – Speculators can actively trade a futures system performance by implementing and ceasing trading of the system based on the peaks and valleys of returns.  For example, it may be an opportune time to begin trading a system that is experiencing a drawdown and call it quits after a good run.  This is because market conditions often fluctuate in cycles in which the performance of technical futures trading systems will also oscillate.  Unfortunately, many system seekers have a tendency to chase performance, but the hot system in the current market environment rarely stands up to changes in market conditions.  For example, if the markets move from trending to a narrow side-ways channel, certain systems will benefit and others will suffer.  We’ve yet to find a system that works in all conditions….most likely because it doesn’t exist.

Drawbacks of using Automated Trading


1.       Automatic Trading Systems lack Common Sense – Because algorithmic systems are driven by technical analysis rather than human discretion they will often generate signals that may be considered low probability trades.  For example, a system may generate a sell signal in a market that is at an all-time low or a buy signal at or near a contract high.

2.       Benefits of Back-Testing are Limited – Systems are often developed through a process known as back testing.  However, back testing simply gives you information on what the system would have done if implemented in the past.  It isn’t reasonable to infer that the same results will be obtained in real time or at any point in the future.

3.       Markets are dynamic, not Static – Similar to the flaws of back testing, system performance at any given point may or may not reflect its ability to operate profitably throughout time.  This is because market conditions are dynamic but system parameters are typically constant.  While system developers can tweak the parameters in order to enhance performance, considerable losses may be sustained prior to recognition of a need to adjust parameters.

4.       Automated Trades might be Contrary to your Opinion – System trading eliminates the emotions involved in making the decision of entering or exiting a market but it can be challenging to watch the system execute a long trade in a market in which you are personally bearish.


Do Automatic Futures Trading Systems Work?

Let’s face it, if making money in the markets was as easy as quitting your day job and buying or leasing a trading system, then everyone would do it.  Unfortunately, it is far more complicated than that.   There are an unlimited number of futures trading system and software sales representatives that will do whatever it takes to convince you that their product is capable of consistent returns in all types of market scenarios.  However, we have yet to find such a “holy grail” of trading.

With that said, there are legitimate systems that have proven to be productive over time and in the right circumstances.  Additionally, many hedge funds and institutional commodity traders have adopted system trading as their primary method of speculation, so they can be useful in the right circumstances. 

Beware of trading systems that promise spectacular returns.  When it comes to futures system trading, if it sounds too good to be true it probably is.  You must realize that many of the system creators and sellers aren’t required to register with the National Futures Association; as a result, they enjoy freedom of speech without accountability.  Not all system vendors abuse the privilege but some do and you owe it to yourself to get the facts before putting your money on the line.  As a consumer, it is imperative that you know who you are dealing with and what is realistic in terms of performance.

*There is substantial risk in trading options and futures.  It is not suitable for everyone. 

Carley Garner is the Senior Strategist for DeCarley Trading, a division of Zaner, where she also works as a broker.  She authors widely distributed e-newsletters; for your free subscription visit www.DeCarleyTrading.com.  Her books, “A Trader’s First Book on Commodities,” “Currency Trading in the FOREX and Futures Markets,” and “Commodity Options,” were published by FT Press.