Automated Trading — Advantages and Disadvantages

Automated trading or simply auto trading enables trading in securities or derivatives through computer programs. The trader no longer presses the buy button himself but leaves the placing of the order to his computer. He always has the opportunity to intervene in the trade himself, but theoretically, he doesn’t have to.

The trader gives the computer a command when and how to open or close a trade. The computer forwards the order to the broker, who executes the order. The advantage is that this code only has to be written once and not again with every further order. The logic of the algorithms is constantly evolving. Today there are computer programs that generate your own trading ideas and then implement them at lightning speed. Another example is algorithms that use current search engines to search for the latest news or trends and, as a result, generate buy or sell orders in stock, forex pair, or index that matches this topic.

Once you have found a working, codable strategy, you have the opportunity, like with manual trading, to generate sustainable profits.

With auto trading, we have so far only described one main topic, which can be broken down into different categories (e.g. high-frequency trading). We will now specifically focus on the possibility of simple algo trading for private traders.

An algorithm is the unique, executable sequence of instructions of finite length to solve a problem. In principle, an algorithm is a logical sequence of given commands. In CFD or Futures Trading the example command could be: “ If the DAX recorded at 10:00 under its previous day’s closing price, then opens up a short position”. In this example, the computer would execute exactly one order every day. In the next step, you would have to add a line to the code that commands the trade to be closed, e.g. if the book loss is -20 points, then close the trade (stop loss). If book profit +20 points, then close the trade (Take Profit).

With this simple strategy, the computer would now check at 10:00 a.m. every day whether to execute the command or not. He does this until the trade feeds him new commands or the account balance no longer allows a trade because the strategy was not profitable. You can check out this getting started guide to make good automatic strategies, test them and make it better over different trails.

Computers are getting smarter. Research is working flat out on various forms of artificial intelligence and intelligent machines are also used in trading. In addition to all the intelligence and discipline that a computer can bring, one must also note that a certain inaccuracy in trading makes sense. This inaccuracy cannot be operated by a computer at all or only to a limited extent.

Furthermore, errors are not always recognized immediately. If a trader is not at the trading desk and the computer orders incorrectly, he continues to do so until the command is canceled or corrected. Such uncertainties can destroy the account.

In addition to the (calculable) disadvantages, there are also a lot of advantages.

Admittedly, the example just shown is really no reason to let this simple trading decision be carried out by a computer. You could even look at the chart every trading day at 10:00 a.m. and decide whether to do the trade or not.

This means that we have already achieved the first advantage of automated trading. The trader can rethink his decision to place a trade at any time and make an emotional decision. If the trades have already ended at a loss 3 days in a row, some traders will doubt the set parameters and distrust their own setup. For example, set brands are moved to prevent fishing, or the short is turned into a long trade because the super indicator XYZ suddenly predicts a long scenario. People are fundamentally weak in spirit and as we all know, the stock market punishes them mercilessly.

Unlike humans, a computer knows no emotions. He stubbornly and stupidly follows the command he receives. This gives him an enormous advantage in trading.

Another advantage is the possible leisure value for the trader. If I don’t have to sit in front of the screen all the time, but let someone else trade according to my ideas, I can use the time sensibly for other projects or leisure activities. And what is particularly chic is that I don’t even have to pay this “assistant” a salary :)

You can also incorporate any indicators you like into the strategy. You can write as many constraints as you like, but here too the basic idea of ​​trading counts: Keep it simple, stupid.

Deepak Gupta is blogger, entrepreneur, marketer, and owner for several stunning technology blogs.