I began trading the futures markets in the late 1970s. The only data source available for trading was daily charts, usually purchased from a vendor and updated by hand. Technical analysis consisted primarily of a few crude indicators. Cycle analysis, Stochastics and the Elliott Wave were some of the most sophisticated and widely taught techniques for traders.
The challenge confronted by individual traders was . attempting to trade against experienced traders and large institutions who had been using daily charts for a long time. How could a neophyte expect to be successful trading against those with many years of experience and substantially greater resources? It was difficult and I was not particularly successful.
In an attempt to get up to speed, I attended the first of its kind Futures Symposium in Chicago in the early 1980s. All of the great trading gurus of the day were there, teaching their trading techniques and selling their newsletters and advisory services. And tucked away in the exhibit area were three new technological advances that came together to change trading forever. The first was the personal computer. The second was real-time satellite delivery of intraday tick data. The third was software to make this tick data into charts and indicators.
It was magic. Watching the brand new CQG machine create a five-minute bar chart before your very eyes! Or watching the Market View PC create indicators, simple moving averages, Stochastics and Larry Williams' %R and update all this real-time! We were witnessing a new world opening up right before our eyes.
This technological revolution instantly put all traders, both experienced and new, those with substantial resources and those with little, on an equal footing. No one, not even the greatest of market gurus, knew how to trade intraday charts because they were too new. So many of us neophytes started trading five-minute bar charts on the newly created S&P 500 Index futures contract at that upstart Chicago Mercantile Exchange. Put up a couple of moving averages, trade the cross-over and it was like shooting fish in a barrel. We could go long and short several times a day. This was a new world. And by the way, I was paying $100 per round turn. My first full year of day trading produced $50,000 in gross trading profits but it cost me $70,000 for execution. The revolution in competitive brokerage commissions had yet to begin, but pressure on commissions had.
As day trading became more common and difficult, and less profitable (fewer fish in the barrel), driven by an increasing number of S&P day traders, the next logical step was to backtest and mechanize the trading process. Unless you had access to the resources of the large trading houses, the only way to backtest …