Pros and Cons of Automated Trading Systems


Are you willing to put your trading strategy in the hands of bots? Learn more about the benefits and drawbacks of algorithmic (algo) trading.

Summary

Across all asset classes, automated or algorithmic (algo) systems execute pre-set orders that are free of human emotion or market movements. This is one of the benefits of algo trading because emotional trading can lead to overtrading, which can lead to losses.

Another advantage of algo trading is that it allows you to trade many accounts and methods at the same time.

Algorithmic trading can help to reduce the number of human trader errors and can find profit and loss (P&L) possibilities considerably faster than a human trader.

Traders who are new to algorithmic trading should avoid it. It takes place largely at large investment banks, hedge funds, proprietary trading firms, and regulated cryptocurrency exchanges, and is based on expensive, complex software.

Contents

Trading is supposed to be about making money, not losing it, but regrettably, many people do lose money. Losses are frequently associated with emotional trading or becoming overly invested in the outcome of a trade.

Over-involvement can lead to over-thinking, which in turn can lead to over-trading, which can result in a loss. Sticking to a consistent strategy can help with trading discipline.

Across all asset classes, automated or algorithmic (algo) systems execute pre-set orders that are free of human emotion or market movements. Cryptocurrency exchanges have begun to provide consumers the option to conduct automated trading strategies through the use of trading bots as a developing asset class with a rapidly growing infrastructure.

Automated trading platforms, however, are not without flaws.

To begin with, computers require a strong internet connection as well as a steady supply of electricity to function. Furthermore, certain trading methods are so complicated that computers are unable to execute them effectively, necessitating regular monitoring and human intervention.

Whether you’re a private investor or a professional trader, you need carefully consider whether automated trading systems would benefit or hinder your trading strategy.

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Advantages of Automated Trading Systems

Eliminates Trading Based on External Factors: Because algorithmic software requires each trade to be programmed, traders can avoid rash or ill-considered purchasing and selling in response to poor economic or company news, or out of fear of missing out (FOMO) on a valuable asset.

Algorithmic trading can help prevent quick-finger transaction errors, such as forgetting to include a zero in a sell order price.

Provides Opportunities for Backtesting: Backtesting is a term used in trading to describe when an investor looks back in time for information on how to invest in the future. This method allows you to examine historical market data to see if a trading plan will succeed based on previous performances.

Instead of guessing and perhaps losing money, you can automate that plan.

Automation Keeps You On Plan: Many traders begin with a trading strategy, only to abandon it over time.

“Plan the trade, then trade the plan,” as the saying goes in the investment world. The latter is significantly easier if you automate your trades so that you can follow your trading plan and achieve successful results over time.

Helps You to Stay Diversified: Trading is all about increasing profits while avoiding risks, and algo trading solutions can assist traders achieve this aim considerably more quickly and without errors than trading manually or with analog instruments.

Computer-assisted trading allows you to trade numerous accounts and methods at the same time, as well as identify profit and loss chances via ultra-fast market scans.

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 Disadvantages of Automated Trading Platforms

Watch Your WiFi and Power Source: Because algo trading systems are electronic, they rely on a consistent power supply — and, more importantly, a strong WiFi connection.

If your automated trading program runs on your computer rather than on the software of a broker, a lost internet connection can result in a large loss if orders are not filled on time.

Over-Optimization: Some trading systems include an optimization tool in addition to backtesting. This feature allows you to choose a range for an input and instructs the computer to determine which input would have worked best for your plan.

Multi-factor optimization capabilities are available in some systems, allowing you to input many variables (combinations of scenarios) to examine how they affect the final output. Unfortunately, although being an appealing exercise, optimizing a backtest in this manner frequently results in a system that performs poorly in practice.

When this happens, your plan is said to be “over-optimized,” which means it’s too complicated for the system to implement in practice; it merely looks good on paper. As a result, it’s a good idea to begin automating your trading with modest, easy orders and gradually gain experience.

Algo Trading Software Is Complicated and Expensive: Algorithmic trading is mostly done by very large trading firms like investment banks, hedge funds, and proprietary trading organizations.

These companies typically develop their own customized trading software due to their financial resources. Individually, algo trading software is used by some experienced proprietary and quantitative traders. Quantitative traders are frequently capable of developing their own software.

Proprietary traders who aren’t as tech-savvy, on the other hand, must purchase the software from their brokers, if they offer it, or from a third-party vendor. Anyone can buy algo-trading software off the market, but it’s usually inferior in one or more ways — it can include loopholes, missing documentation, and so on. If you’re considering about buying off-the-shelf algo-trading software, you should probably bring along an expert consultant.

Furthermore, algo trading software is excessively pricey for the common consumer.

Scammers: Scammers exist everywhere, even automated trading systems. You should be highly suspicious if a system promises something that is “free” or “too good to be true.” Before paying any money for an automated trading system’s services, properly research the company and read the fine print.

Compare and contrast the system to similar products and read customer reviews on a variety of credible sources.

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Should You Automate at All?

If you’re trying to trade from your home computer, a server-based automated trading system from an exchange can help you avoid disaster if your personal internet connection fails.

But, if you’re on the fence about whether algorithmic trading is right for you, think twice. Setting up an effective algo strategy takes a lot of time, money, and technological skill. If you’re a skilled trader, you should give algo trading a shot to see if it fits your trading style and temperament.

You might want to try your hand at algo trading if you’re a disciplined individual trader with additional time and money to spare and a high-risk tolerance.

But, before you go all-in, consider starting with a simple custom or “wizard” approach until you have more experience with algo trading. A wizard strategy is essentially a template that you can modify to meet your specific trading objectives and parameters.

Furthermore, some traders believe that combining automated and manual trading tactics improves results. That could also be a tactic to try before you fully commit to algo trading.