This review will be about Inovance Tech’s TRAIDE system. It is an application geared towards letting retail investors apply proprietary machine learning algorithms to assist them in creating systematic trading strategies. Currently, my one-line review is that while I hope the company founders mean well, the application is still in an early stage, and so, should be checked out by potential users/venture capitalists as something with proof of potential, rather than a finished product ready for mass market. While this acts as a review, it’s also my thoughts as to how Inovance Tech can improve its product.
A bit of background: I have spoken several times to some of the company’s founders, who sound like individuals at about my age level (so, fellow millennials). Ultimately, the selling point is this:
Systematic trading is cool.
Machine learning is cool.
Therefore, applying machine learning to systematic trading is awesome! (And a surefire way to make profits, as Renaissance Technologies has shown.)
While this may sound a bit snarky, it’s also, in some ways, true. Machine learning has become the talk of the town, from IBM’s Watson (RenTec itself hired a bunch of speech recognition experts from IBM a couple of decades back), to Stanford’s self-driving car (invented by Sebastian Thrun, who now heads Udacity), to the Netflix prize, to god knows what Andrew Ng is doing with deep learning at Baidu. Considering how well machine learning has done at much more complex tasks than “create a half-decent systematic trading algorithm”, it shouldn’t be too much to ask this powerful field at the intersection of computer science and statistics to help the retail investor glued to watching charts generate a lot more return on his or her investments than through discretionary chart-watching and noise trading. To my understanding from conversations with Inovance Tech’s founders, this is explicitly their mission.
(Note: Dr. Wes Gray and Alpha Architect, in their book DIY Financial Advisor, have already established that listening to pundits, and trying to succeed at discretionary trading, is on a whole, a loser’s game)
However, I am not sure that Inovance’s TRAIDE application actually accomplishes this mission in its current state.
Here’s how it works:
Users select one asset at a time, and select a date range (data going back to Dec. 31, 2009). Assets are currently limited to highly liquid currency pairs, and can take the following settings: 1 hour, 2 hour, 4 hour, 6 hour, or daily bar time frames.
Users then select from a variety of indicators, ranging from technical (moving averages, oscillators, volume calculations, etc. Mostly an assortment of 20th century indicators, though the occasional adaptive moving average has managed to sneak in–namely KAMA–see my DSTrading package, and MAMA–aka the Mesa Adaptive Moving Average, from John Ehlers) to more esoteric ones such as some sentiment indicators. Here’s where things start to head south for me, however. Namely, that while it’s easy to add as many indicators as a user would like, there is basically no documentation on any of them, with no links to reference, etc., so users will have to bear the onus of actually understanding what each and every one of the indicators they select actually does, and whether or not those indicators are useful. The TRAIDE application makes zero effort (thus far) to actually get users acquainted with the purpose of these indicators, what their theoretical objective is (measure conviction in a trend, detect a trend, oscillator type indicator, etc.)
Furthermore, regarding indicator selections, users also specify one parameter setting for each indicator per strategy. E.G. if I had an EMA crossover, I’d have to create a new strategy for a 20/100 crossover, a 21/100 crossover, rather than specifying something like this:
short EMA: 20-60
long EMA: 80-200
Quantstrat itself has this functionality, and while I don’t recall covering parameter robustness checks/optimization (in other words, testing multiple parameter sets–whether one uses them for optimization or robustness is up to the user, not the functionality) in quantstrat on this blog specifically, this information very much exists in what I deem “the official quantstrat manual”, found here. In my opinion, the option of covering a range of values is mandatory so as to demonstrate that any given parameter setting is not a random fluke. Outside of quantstrat, I have demonstrated this methodology in my Hypothesis Driven Development posts, and in coming up for parameter selection for volatility trading.
Where TRAIDE may do something interesting, however, is that after the user specifies his indicators and parameters, its “proprietary machine learning” algorithms (WARNING: COMPLETELY BLACK BOX) determine for what range of values of the indicators in question generated the best results within the backtest, and assign them bullishness and bearishness scores. In other words, “looking backwards, these were the indicator values that did best over the course of the sample”. While there is definite value to exploring the relationships between indicators and future returns, I think that TRAIDE needs to do more in this area, such as reporting P-values, conviction, and so on.
For instance, if you combine enough indicators, your “rule” is a market order that’s simply the intersection of all of the ranges of your indicators. For instance, TRAIDE may tell a user that the strongest bullish signal when the difference of the moving averages is between 1 and 2, the ADX is between 20 and 25, the ATR is between 0.5 and 1, and so on. Each setting the user selects further narrows down the number of trades the simulation makes. In my opinion, there are more ways to explore the interplay of indicators than simply one giant AND statement, such as an “OR” statement, of some sort. (E.G. select all values, put on a trade when 3 out of 5 indicators fall into the selected bullish range in order to place more trades). While it may be wise to filter down trades to very rare instances if trading a massive amount of instruments, such that of several thousand possible instruments, only several are trading at any given time, with TRAIDE, a user selects only *one* asset class (currently, one currency pair) at a time, so I’m hoping to see TRAIDE create more functionality in terms of what constitutes a trading rule.
After the user selects both a long and a short rule (by simply filtering on indicator ranges that TRAIDE’s machine learning algorithms have said are good), TRAIDE turns that into a backtest with a long equity curve, short equity curve, total equity curve, and trade statistics for aggregate, long, and short trades. For instance, in quantstrat, one only receives aggregate trade statistics. Whether long or short, all that matters to quantstrat is whether or not the trade made or lost money. For sophisticated users, it’s trivial enough to turn one set of rules on or off, but TRAIDE does more to hold the user’s hand in that regard.
Lastly, TRAIDE then generates MetaTrader4 code for a user to download.
And that’s the process.
In my opinion, while what Inovance Tech has set out to do with TRAIDE is interesting, I wouldn’t recommend it in its current state. For sophisticated individuals that know how to go through a proper research process, TRAIDE is too stringent in terms of parameter settings (one at a time), pre-coded indicators (its target audience probably can’t program too well), and asset classes (again, one at a time). However, for retail investors, my issue with TRAIDE is this:
There is a whole assortment of undocumented indicators, which then move to black-box machine learning algorithms. The result is that the user has very little understanding of what the underlying algorithms actually do, and why the logic he or she is presented with is the output. While TRAIDE makes it trivially easy to generate any one given trading system, as multiple individuals have stated in slightly different ways before, writing a strategy is the easy part. Doing the work to understand if that strategy actually has an edge is much harder. Namely, checking its robustness, its predictive power, its sensitivity to various regimes, and so on. Given TRAIDE’s rather short data history (2010 onwards), and coupled with the opaqueness that the user operates under, my analogy would be this:
It’s like giving an inexperienced driver the keys to a sports car in a thick fog on a winding road. Nobody disputes that a sports car is awesome. However, the true burden of the work lies in making sure that the user doesn’t wind up smashing into a tree.
Overall, I like the TRAIDE application’s mission, and I think it may have potential as something for the retail investors that don’t intend to learn the ins-and-outs of coding a trading system in R (despite me demonstrating many times over how to put such systems together). I just think that there needs to be more work put into making sure that the results a user sees are indicative of an edge, rather than open the possibility of highly-flexible machine learning algorithms chasing ghosts in one of the noisiest and most dynamic data sets one can possibly find.
My recommendations are these:
1) Multiple asset classes
2) Allow parameter ranges, and cap the number of trials at any given point (E.G. 4 indicators with ten settings each = 10,000 possible trading systems = blow up the servers). To narrow down the number of trial runs, use techniques from experimental design to arrive at decent combinations. (I wish I remembered my response surface methodology techniques from my master’s degree about now!)
3) Allow modifications of order sizing (E.G. volatility targeting, stop losses), such as I wrote about in my hypothesis-driven development posts.
4) Provide *some* sort of documentation for the indicators, even if it’s as simple as a link to investopedia (preferably a lot more).
5) Far more output is necessary, especially for users who don’t program. Namely, to distinguish whether or not there is a legitimate edge, or if there are too few observations to reject the null hypothesis of random noise.
6) Far longer data histories. 2010 onwards just seems too short of a time-frame to be sure of a strategy’s efficacy, at least on daily data (may not be true for hourly).
7) Factor in transaction costs. Trading on an hourly time frame will mean far less P&L per trade than on a daily resolution. If MT4 charges a fixed ticket price, users need to know how this factors into their strategy.
8) Lastly, dogfooding. When I spoke last time with Inovance Tech’s founders, they claimed they were using their own algorithms to create a forex strategy, which was doing well in live trading. By the time more of these suggestions are implemented, it’d be interesting to see if they have a track record as a fund, in addition to as a software provider.
If all of these things are accounted for and automated, the product will hopefully accomplish its mission of bringing systematic trading and machine learning to more people. I think TRAIDE has potential, and I’m hoping that its staff will realize that potential.
Thanks for reading.
NOTE: I am currently contracting in downtown Chicago, and am always interested in networking with professionals in the systematic trading and systematic asset management/allocation spaces. Find my LinkedIn here.
EDIT: Today in my email (Dec. 3, 2015), I received a notice that Inovance was making TRAIDE completely free. Perhaps they want a bunch more feedback on it?
Pingback: Quantocracy's Daily Wrap for 11/14/2015 | Quantocracy
Pingback: Best Links of the Week | Quantocracy
Just an FYI there is such a product like strategyquant that does the same stuff. although I have no evidence at all if this is the way they do it, but with a strategyquant engine running in the background, you can build a pretty website as well with these functionalities and start marketing. if you look at how it generated code, it is just automation of permutation and combination of indicators. there is no so-called intelligence in it. the only thing intelligent about it is how it is marketed. I hope and I do believe AI will eventually help in this field but definitely not in this fashion. I am no top expert in AI but I am really pissed whenever I see those companies exploit ppl’s ignorance about new technology(ML/AI is not even new technology). by the way, I love your blog, critical thinking, and generosity with your ideas.