NAIROBI, Kenya August 15 – For centuries speculators have been trading commodities, shares and currencies in the hope of making a profit.
As time has progressed, this has become an increasingly complex world with new ways to trade as well as whole new markets to explore.
Alongside this, increasingly sophisticated tools have also become available to help not just with decision-making, but with the actual process of carrying out the trades themselves. One of the most significant of these has been the emergence of automated trading.
Some swear by it, others advise caution. But, as with many areas the financial world, there are no hard and fast answers.
What is automated trading?
As the name suggests, this is automatic trading which is carried out by computers as the speculator looks on. It has been gradually gaining traction as a trading method particularly in areas that are fast moving such as in currency markets.
So that’s what automated trading is, but how exactly does it work? Like most computer-generated actions, it is dependent on algorithms that drive a program set to act when certain conditions occur.
These are established by the individual trader, often in collaboration with a programmer, and dictate the precise times when to buy or sell. So, for example, it can be built into the program to “buy shares in X when the 50-day moving average goes above the 200-day average” or to “sell when the dollar dips below 87 cents of the euro”.
To do this, the computers that carry out the trades are constantly monitoring the markets so are able to react almost immediately to price movements.
There are a wide number of brokers available and the watchword for many of them has been to make entering the world of automated trading as easy as possible. While many allow the new trader to tailor-make their trading strategy, almost all also have software wizards that can take you through the process with no need for any programming knowledge.
For the novice, this can often be the best way to start.
The pros of automated trading
There are a number of definite advantages to automated trading, as well as a few less welcome features. But let’s focus on the benefits first.
- It takes away the emotion
However dispassionate we hope that we’re going to be when we trade, emotions inevitably start to intrude. This is especially true when markets are volatile and fast moving. This can mean judgment can be clouded.
This can lead to opportunities being missed as well as undue risks being taken. Because remaining disciplined in your approach at all times is so important, letting the program do all the decision-making can help greatly with this.
- It’s fast!
The markets wait for no-one. So having the knowledge that trades can be made within seconds, not minutes, of the criteria being met is very reassuring. And carrying out trades immediately can make all the difference between seeing a profit or a loss.
- You can backtest
Naturally, how successful your automated trading will be is going to depend on establishing the right criteria. Most brokers’ programs will allow you to put your ideas to the test using market data and movement from the past.
While past performance is no guarantee of future performance, this can give a pretty good idea about just how robust a strategy might be. It also gives plenty of opportunities to fine-tune the criteria.
- It allows diversification
For traders who like to have several plates spinning at once, automated trading lets you run different accounts, and different strategies, at the same time. This not just increases the chance of profitable investing, it also spreads the risk.
What are the cons of automated trading?
- Mechanical failure
Because you’re relying on computer software and hardware to carry out trades, if either of these fail, or if an internet connection goes down, then the trades will not be being made. This means that, although it’s an automated system, it will still need to be monitored closely.
- Trading anomalies
Similarly, no computer programs are infallible. So there may be certain situations in which anomalies occur and trades are made which go against the criteria established. Often, these are just teething troubles that can be quickly resolved. However, this is a good reason to keep trades small to begin with until you start to have total confidence in the system.
- Backtesting is not infallible
While it can give an indication of how markets perform, the backtesting you do is no guarantee of future success.
So what’s the conclusion?
When all things are considered, automated trading can be a sound strategy, especially for markets that are fast moving. So anyone considering automated forex trading, for example, should certainly give it serious consideration.
What will be key is choosing the right system to use, but fortunately there is a wide choice out there and many are featured on reliable and reputable review sites.
It’s also important to start gradually, perhaps by using a mixture of manual and automated trading just until you get more used to using the latter.
It’s also something that is definitely not for novice traders as you will need quite a good understanding of how markets work, and what affects them, when you are setting up your trading criteria.
That said, automated trading certainly has a role to play – but just how big a role is always going to be up to the individual trader.
