Automated Trading, (AT), has been around for a while now with many investors with computer coding experience taking the option as their preferred route to market success. Invariably we have seen many lose and many gain the same as the orthodox discretionary trading method.
At Ice Fx we promote risk aversion via diversification, so using automated trading systems can be an advantage to increasing capital growth of your portfolio with minimal fuss, but it is not for every investor. Below we will look at the key advantages and disadvantages of AT.
Disadvantages:
– We have heard many times of spikes in the market driving the price in one direction before a drastic reversal and then the price ending up going in the opposite direction. Some of these trades have been elongated or exaggerated in price movement as automated systems have triggered from the initial move, thus fuelling the exaggeration of the price movement. The snap reaction is market correction which inevitably lead to many of the AT positions closing or left in the red. Allowing the AT system to enter and close positions without the supervision of a trader can lead to unnecessary exposure that would not be the case if traded with a discretional approach. So, to conclude, market volatility can be caused by badly managed AT systems and can lead to considerable damage to the trading account if unmanaged during volatile market conditions.
– If the AT system is working of computer rather than a server, (dependent on trading platform), then any malfunction, power issue or software problem can lead to the order not being processed correctly or even not being processed altogether.
Advantages:
- Improving the consistency of winning trades via back-testing of trading strategies. Back-testing strategies is vital to success for a trader. Using historic data to see analytics on the performance of a strategy and then modifying accordingly before testing again can ensure a greater chance of winning. Normally back-testing can be very time consuming and cumbersome for a trader but with many AT systems it is a headache free and simple procedure.
- An improved order speed can lead to precious time being saved and the automation of recurring orders being filled with more ease than on a discretional basis. As all conditions for the strategy are set, the automation of entry, stop and profit target are will lead to multiple entries being filled with the correct parameters
- As the AT system undertakes the job of finding the correct set up and executing as planned, the discipline needed for a trader, (the most common problem that results in losses for traders), is negated. Emotions do not factor in, the opportunity to gamble on “a gut feeling” or a “quick punt” also are not presented. The trading plan instructed by the trader would be followed allowing no deviation from the programmed instruction.
In conclusion the use of automated systems can help the trader improve portfolio profits but with obvious risks. The diversification of the trading account is the most important feature that will keep AT systems around for many years to come. The function of trading multiple accounts simultaneously whilst spreading risk over a wide range of instruments and as is the case for many AT systems hedging the trade against another allows the trader to fill positions in a timeframe that would not be as easy if to be done manually.