Automation in trading usually refers to the setting up of particular rules between both the trading partners regarding their entry and exit, which can be executed automatically with the help of a computer. Most of the shares in the US stock exchanges (70 to 80 percent to be precise) come from trading systems with automation.
Automation is usually not very complicated, and if the stats above prove anything, it is that automation is a lot in demand by trading companies. At the same time, you should have a look at both sides of the coin and then decide for yourself, if automation is wise decision for trading. If you already do trading then you should definitely check out this important article by Trustpedia here. Below I have listed the advantages and disadvantages of this mechanism so that you can decide easily.
Advantages of automated Trading
Minimizing Emotions:
The first major advantage of automation in trading is to keep a check on emotions by minimising them throughout the trading. As a result, traders are able to adhere to the plan drawn much easily. Traders do not hesitate or question the terms that they have set together especially after the trade orders have been executed. In addition to that, automation is trading acts as a check on those traders too who are very overenthusiastic and indulge in any kind of trade at the drop of a hat.
Backtesting:
Automation in trading requires the rules to be absolute and not open to interpretation by the traders. They can use historical data in order to test these rules so that its viability can be sustained. Most importantly, this kind of backtesting acts as a crucial check for the traders who may be risking their money during a certain trade deal. It also allows traders to evaluate a particular trading and understand its expectancy. In other words, traders try to know how they can lose or win by participating in a particular trade.
Preserving Discipline:
Another major advantage of automation is that the volatility of the market can be avoided since all trade rules are set up and executed automatically. Other than that, this volatility can also arise due to emotions coming in between business such as the apprehension that one may not lose substantially. The presence of a set of regulations ensures that a certain discipline is maintained during the transactions. It also decreases the instance of a “pilot error”. What traders need to keep in mind is that they will never win each time they enter into a trade. This can have a negative impact on the trader as they might not wish to trade after two or three, despite the fact that the next trade could have ensured them heavy profits. Automation in trading is responsible to ensure a certain stability to the system at hand.
Improving Order Entry Speed:
Automation in trading is characterised by the ability to consider the changing conditions of the market before generating orders. Automation in trading ensures that all orders are generated automatically. This includes the profit targets as well as the protective stop losses. It is important to know trade deals are worth participating in and which ones are not. Automation helps to decide these things even if it is by the fraction of second before you leave or join a trade deal.
Diversifying Trading:
Automation allows the traders to open multiple accounts and use them simultaneously or just one at a time. Automation enables the trader to accomplish certain in a matter of milliseconds which would otherwise take a human, years together, not to mention the possibility of failure. Automation can monitor the trading patterns as well as generate orders.
Disadvantages of Automated Trading
Mechanical Failures:
Despite seeming to be a simple and sophisticated format of trading, automation has its own flaws. The trade order may exist in computer or a server depending on the trading platform being used. In simpler terms, if the internet connection snaps, it can disrupt the flow of the orders. In addition to that, what is often stated in theory, may not always be realised in practice which is why it is advisable to kickstart a small-scale trade.
Monitoring:
Even though automation is all about not having to monitor the trading, in reality, some amount of monitoring becomes necessary. Technology failure is a major risk for any automated system in addition to the usual suspects in the form of power cut, loss of connection, or the system crashing. The result of this will be error in orders and missing out on profit-generating deals.
Over-Optimization:
Backtesting usually looks good on paper but not so much in a live market. The dangers of over-optimisation are usually associated with generating trading plans that are highly unreliable. The inaccurate assumptions on the part of traders that profitable trades never experience any downfall usually falls through when tested in the real market.
