Indication of what errors can occur in trading strategies on the HUPX exchange and what consequences they can have for the investor.
Lack of Risk Management Strategy - This is a situation where an investor on the HUPX exchange has not precisely defined their risk profile and has not established an action plan for various market scenarios. This can lead to unpredictable and significant financial losses.
For example, not setting loss and profit limits - the investor does not specify the extent of losses they are willing to accept and the extent of profits at which they intend to exit the position. In the event of unexpected market movements, the investor may lose a significant portion of their capital.
At this point, we enter the stop loss and take profit strategy. In the context of the HUPX market, an exchange participant can calculate the profit or loss of their position in various ways. But an important element is calculating the size of the position they hold. Here one can choose one of two paths: the so-called "net market position," which means nothing more and nothing less than the total volume of the position on a given product. If a total of 2MW of energy has been sold, that position is stated. In the second approach, one can include the forecast for energy consumption/production. If the forecast says that 3MW of energy will be produced by the delivery time, the position will then be that we have 1MW in reserve, in the so-called long position, which should be sold off before the balancing phase.
Depending on the methodology for calculating the position, the occupied position in the market looks different. And returning to the tp and sl strategy, having a selected method for calculating the volume of the occupied position, it can be multiplied by the transaction price, the offer prices, or the forecasted price on the balancing market, and the value of the position calculated. Depending on the defined sl or tp levels, the strategy may close part/all of the position, minimizing loss or booking profit.
High Propensity for Risk-Taking - In the context of selling energy on the HUPX exchange, too great a propensity for risk-taking can manifest itself in various ways, for example:
Executing Too Large Transactions: An investor may decide to execute too large transactions on the HUPX exchange, assuming that this will increase their profits. However, this approach involves a high risk of incurring large losses, as even small changes in energy prices in the market can lead to significant changes in the investor's profits or losses.
For example, a change in the energy price from 100 euros per MWh to 98 euros per MWh. With a portfolio position of 1 MW, the loss will be 2 euros. But with a position of 100 MW, the loss will be 200 euros.
Poorly Designed Strategies - An example can be a lack of knowledge about how a properly placed order should look. Ignorance of the minimum and maximum volumes, or numerical accuracy (0.1MW), can cause the exchange to reject the order as incorrect.
Lack of Knowledge of Market Specifications and Their Interactions - An energy exchange participant may neither be a consumer nor a producer of energy. Their goal is to speculate in the energy market. Due to their lack of knowledge, they may not close their open positions on the day-ahead and intraday markets, forcing the investor to participate in the balancing market. In particular, in the Czech energy market, these prices are very unfavorable for those holding any positions and can cause significant losses.
Excessive Emotional Decision-Making - In the context of selling energy on the HUPX exchange, this can lead to unfavorable decisions and financial losses. For example, an investor who is too emotional and makes decisions under the influence of temporary impulses may:
Sell energy at too low a price - when the investor is too emotional, they may make rash decisions, such as selling energy at too low a price to quickly get rid of stocks. This can lead to financial losses, as the price of energy may rise in the next few days.
Hold on to energy for too long - on the other hand, an investor who is too emotional may also not sell energy even when prices are high. This may be due to fear of losing energy or hope for an even greater profit. Such a decision can lead to the loss of an opportunity to sell energy at an attractive price.
Make too risky decisions - when the investor is too emotional, they may be inclined to make too risky decisions, such as investing in uncertain projects or irrational investment decisions. This approach can lead to significant financial losses.
All of the above situations can lead to the investor losing money, so it is important to make investment decisions in a rational and thoughtful manner, without the influence of emotions.
Lack of Exit Strategy - Trading energy on the HUPX exchange involves buying or selling electrical energy at specific delivery times. In this context, a lack of exit strategy can lead to the investor incurring losses.
For example: if an investor forecasts that they will be able to produce 5MW of energy and sell this energy on the HUPX market, they should have strictly defined conditions for when they will reduce their market position if this forecast decreases.
Another example could be when a speculator also takes a position and the price undergoes a significant change, or the intraday phase is nearing its end.
If such conditions are not specified, the trader may incur significant losses by exiting the position at very unfavorable prices or by participating in the balancing market.
Insufficient Monitoring of Positions - On Hupx you can buy 1-hour and 15-minute contracts. However, the settlement of these contracts always occurs on 15-minute contracts. It's easy to make a mistake by calculating your position solely based on the current position of the 15-minute product and forgetting about your position on the 1-hour contract. As a result, a wrongly calculated actual position can also cause financial losses.
Delayed Order Execution - An investor may not execute an order in a timely manner, leading to a change in price and incurring losses. In the case of a temporary high and rapid price change, a human or slow algorithm is not able to make the correct decision in a timely manner, which will result in financial loss.
Data Errors - Poorly constructed data sources, not considering errors that may occur in transaction systems, mean that despite a good strategy, the trader will still lose. Here are some examples of data in which errors are most likely to occur:
Orderbook:
Errors in order book construction
Building an order book for autotrading systems may be associated with certain risks that may affect the accuracy and effectiveness of the system. Here are some potential threats:
Differences in order execution times: When building an order book, it is important to ensure that buy and sell offer data is up-to-date and accurate. In some cases, the time difference between order book updates and order execution may cause the system to buy or sell an asset at the wrong price.
Lack of Liquidity: When assets for which the order book is being built have low liquidity, it may make the order book less accurate.
Human Error: Building an order book is a complex process and the person responsible for its creation may make an error or omit important information. In such a situation, the order book may not reflect the real market situation, which may lead to bad decisions being made by the autotrading system.
Risk associated with data mining: During order book construction, investment data is collected and processed. There is a risk that some of this data may be incorrect or improperly interpreted, leading to wrong investment decisions.
To minimize the risk of incorrect construction, you can:
– Fully understand the specifications and documentation of the exchange on which you are building the order book
– Continuously test the results and compare them to what the exchange provides using backtesting
– Compare results with benchmarks
Forecasting Production/Consumption:
It is often the case that you should analyze the production forecast of not individual products but a product group. It's easy to detect anomalies that are likely to be overestimated or underestimated values. For example: for 4 consecutive 15-minute contracts, energy production is forecasted at 1, 1, 5, 1 MW levels. It is almost certain even for an inexperienced investor that the production of the third contract is very high compared to the others. Probably a better solution would be to sell 1MW instead of 5.
Another example could be not taking into account planned power plant outages. Then we are dealing with an overestimation of production compared to what will actually be produced. Such information should be included in the view for the trader or algorithm.
Cross-border Intraday Capacity:
Cross-border intraday enables real-time electricity trading between different European countries, allowing for a quick response to changes in demand and supply in individual countries as well as changes in weather conditions, which affects the production of energy from various sources.
There are intercountry capacity limits, i.e., the maximum amount of energy that can be transmitted from one country to another in a given time. These limits depend on many factors such as the capacity of transmission lines, transformer capacity, and energy demand in the destination country.
Failure to consider restrictions may result in surprise reduced liquidity in the market, and thus an increase in losses during trading.
Information Delivery Time:
Sometimes it may be that the trader, looking through and analyzing historical data, may find a variable that will positively affect the achieved results if applied to the strategy. The trouble is that this variable is published at a time when its usefulness drops to zero. Examples include Mavir settlements, which occur 2-3 days later.