Use Brute Force to Grab Profits

Hey there, Power Profit Traders!

Today’s newsletter is to teach you all about “brute force algorithms”, and how you can apply this knowledge to trading!

That term may sound daunting, but it’s really quite simple once you break it down…

I have used brute force algorithms when developing my market analysis tools and strategies, especially my A.I. powered trigger event software – BRUTUS.

You’ve probably heard me talk about BRUTUS before, it’s the software I use to find trades for Operation Surge Strike.

What Are Algorithms?

In order to understand what a “brute force algorithm” is, we need to understand what the terms “brute force” and “algorithm” mean individually.

An algorithm is “a process or set of rules to be followed in calculations or other problem-solving operations, especially by a computer.”

That came straight from the dictionary, by the way.

So an algorithm doesn’t have to be mathematical, it is a process or set of rules to follow to solve a problem, or answer a question…

What problem do we face as traders? I mean, when you boil it down, what is the fundamental problem we are trying to solve? Is it one of these:

  • How do I make money from trading?
  • Which indicator is better, the RSI or MACD?
  • Is the S&P 500 up or down for the day?
  • How much wood could a woodchuck chuck if a woodchuck could chuck wood?

I don’t think any of us wants a philosophical debate about it – so here’s a very simple question which I think sums it up:

What financial instrument should I trade right now?

So our “algorithm” would be a series of steps we follow to determine which financial instrument to trade – but what are the steps?

Don’t worry, we’ll circle back around to that question!

Wikipedia defines a brute-force search as:

“…systematically enumerating all possible candidates for the solution and checking whether each candidate satisfies the problem’s statement.”

To put this another way, it means, “test every possible scenario until you find the answer.”

So when we combine that with what we know about algorithms, we can define a brute force algorithm as:

Testing every combination of financial instrument, trading strategy, and trade type to find the combination(s) that best fit(s) my criteria for success.

Yeah, that was just as confusing to write as it was to read, so I’m going to illustrate with an example.

Let’s start with just one stock, which we will call Stock 1. They will be announcing earnings next month and we want to decide if we should trade it.

In Operation Surge Strike, we trade leading up to high volatility events such as these, and BRUTUS does all of the leg work for us.

I am a pattern trader, which means I am looking for patterns on stocks that repeat time and time again, and I use historical data for thousands of instruments to feed BRUTUS’s algorithmic engine.

BRUTUS takes the stock AND options price data for Stock 1 and runs a test to see what happened during previous earnings announcements.

Testing one stock couldn’t possibly be that much work, right?

Wrong, and I'll Tell You Why

Indicators, timeframes, types of trades, trade performance, not to mention the thousands of optionable stocks you would have to test against each of those!

Is it possible for a human to do? Maybe…but it would take a LONG time, and by the time you finish you would have to do the tests again because market conditions (and likely the seasons as well) will have changed!

Each test is actually made up of many individual tests, because we have to check every condition combination!

I’m going to keep it simple, and just test these conditions:

  1. How many days before earnings should we place a trade?
  2. What type of trade should I place? Call, Put, Call Spread, Put Spread, or Straddle?
  3. How many days before earnings should I close the trade?

How many tests would have to be run to determine which of the condition sets has the best performance?

Test #1 Conditions
Open trade 30 days before earnings
Call Option
Close the trade 1 day before earnings

Test #2 Conditions
Open trade 29 days before earnings
Call Option
Close the trade 1 day before earnings

And so on and so forth until every combination has been tested…

To test every combination of these 3 conditions for 1 stock would take over 2,000 tests!

BRUTUS analyzes over 3,000 stocks, which means it’s running well over 6,000,000 tests every day!!

Add to that all of the analysis and performance data it’s storing for EVERY TEST of EVERY STOCK, and the reason it’s called BRUTUS is clear!

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