Regular income with automated trading

Even when you got a profitable strategy, like one of Zorro's Z systems, it's not trivial to squeeze a regular income out of it. The markets go through periods of different efficiency and cause a high fluctuation of trade results. Systems that generate a relatively safe income are mostly based on mid-term or long-term strategies, but can still suffer long drawdown periods of several months, even up to a year. Drawdowns are no strategy flaw, but a logical and mathematical consequence of profitable long-term trading.
  Admittedly, a 12-month drawdown does not sound well suited for a regular income. But there's a simple trick to overcome drawdown periods: Do not rely on one single trading algorithm and one single asset. With many uncorrelated algorithms and assets, a drawdown on one combination is cancelled by a win series on another - at least in theory. In reality, you'll find that many assets are more or less correlated, either positively or negatively. Still, a combination of different assets and trade algorithms gives you the relatively steady profit curves that you can see from Zorro's included Z strategies.

Seven rules for earning money with automated trading

Typical live equity curve of an automated trading system (Zorro Z5). Note the equity fluctuations and the negative peaks during the first weeks due to the increasing number of open trades. Although the system is steadily winning, pulling out at any initial equity downpeak would end up with a loss. It takes about 8 weeks until enough profit is accumulated for keeping the equity curve safely above zero. Other systems have even higher equity fluctuations and longer drawdown periods.

See also:

Strategy, Testing, Z systems, Links

► latest version online