Trading With A Day Job: Can Automated Trading Strategies Be Profitable?

Abstract

The focus of the research is the profitability of using automated trading strategies. In other words, can trading strategies that are automatically executed in financial markets be profitable? In this study, three strategies are traded in a simulated environment under two different types of market conditions and on two different underlying assets. The trading strategies are based on a moving average crossover system with 5, 10, and 20 day moving averages. The first strategy uses only this moving average crossover system. The second strategy uses this same moving average system requiring increasing volume confirmation to make a trade. The final strategy uses this moving average crossover system but requires confirmation by a relative strength index to make a trade. The two market conditions used are an upward trending market and a consolidating market. The assets traded are the NASDQ 100 (i.e., QQQQ) and the S&P Deposit Receipts Trust (SPY). These assets tend to have different levels of volatility over time.

The automated trading strategies are simulated using historical data and the trading software TradeStation. TradeStation allows for trading strategies to be implemented and tested on historic data at various time intervals and using a variety of time charts. A number of numeric values are also calculated by TradeStation including the number of trades and the profit or loss produced by these trades. The simulation results indicated that for both assets in markets that trend upwards, the moving average strategy with confirmation by the relative strength index dominated the other two strategies in terms of profits. During consolidating market periods, the simulation results are less clear. The magnitude of the profits when trading the relatively stable S&P varied across the three strategies and various time charts. However for the more volatile NASDQ 100, profits tended to be greater for the simple moving average strategy than the other two strategies.