Automated trading systems are becoming an increasingly attractive prospect to traders. Seasoned traders can leverage such systems to engage in more markets and speculate on a broader range of trading instruments. Otherwise known as algorithmic trading, these automated systems streamline everyday processes, allowing traders to develop more advanced strategies. For the novice, algorithmic trading can help flatten the learning curve, allowing those with less experience to explore markets and trading tactics usually locked out to them.
Keen to learn more about how automated trading can help you? Below, we’ll explore the pros and cons to help you decide whether algorithmic trading is the right tool for you.
Pro: Faster Execution and Efficiency Gains
One of the chief benefits of embracing automation is the ability to make multiple trades at once. By executing multiple trades simultaneously, you can significantly increase your odds of landing a sizable return. What’s more, provided that proper inputs have been provided, algorithmic trading eliminates human error. This level of automation can help new traders establish themselves more quickly, enabling them to explore multiple markets and diversify their portfolios quickly.
Con: Some Systems Are Incredibly Complex
Algorithmic trading systems are incredibly complex, even for the end user. To use these systems effectively, traders need to have a firm grasp of programming languages and the expertise to fine-tune a system to their requirements. Few traders are also expert programmers, with most having to learn the required skills after the fact. Even after becoming versed in programming languages and development, they still might not be making the most of a system unless it’s one they created themselves.
Pro: Explore Multiple Markets and New Trading Opportunities
Looking to broaden your horizons beyond stock indices or forex? If you’re desperate to diversify your portfolio or secure heftier profits, automated trading systems are the way to go. With algorithmic trading, you can engage with multiple markets simultaneously and capitalise on all manner of investment products. Historically, this level of diversification was only available to large-scale enterprises. Today, automation opens up a world of opportunities for the solitary investor or small-time operation.
Con: Technical Challenges and Limitations
Automated trading systems can fall foul of all the usual software challenges, as well as a multitude of technical problems. Internet downtime and connectivity issues can derail trading efforts and prevent 24/7 operation. Meanwhile, unanticipated bugs and coding problems can disrupt basic processes like trade execution. Overcoming these potential problems requires due diligence and additional technical expertise from traders.
Pro: Reduced Operational Costs
There are many ways to slash operational costs when trading online, from using afree VPS server to choosing a broker with low transaction costs. Algorithmic trading can bring costs down further, with automated tools allowing traders to step back from time-consuming manual tasks.
Con: They Can Only Be Adapted So Far
In an ideal situation, automated trading systems can help traders streamline their operations and execute many successful trades simultaneously. However, the trading world and market conditions are changing all the time. For a system to be effective, it needs to be able to adapt to these changes. While some systems are flexible enough to accommodate constant changes, some are not. Those systems that fall into the latter category will quickly prove redundant.
Pro: Tailored Trading Strategies
If you’ve been active for some time, you’ve probably been keeping a trading journal. If you’ve been using it effectively, you’ll have turned to that journal to learn from your successes and mistakes, adjusting your trading activities accordingly. With an automated trading system, you have access to a far richer repertoire of data and trading insights. With these, you can rigorously assess your previous activity and the performance of individual trades and trading strategies. Even with algorithmic trading, there’s always room for improvement. However, you’ll have everything you need to make the necessary adjustments to improve your strategy and increase profit margins.
Con: Optimization Challenges
While there’s definitely scope for optimization with automated trading systems, too much optimization can lead to problems. For example, algorithmic systems do allow for valuable backtesting, with traders able to leverage historical data to shape trading strategies. However, systems can become ultra-focused on specific data sets that ultimately prove to be irrelevant to real-world market conditions.
Pro: Say Goodbye to Emotional Trading
It’s easy to let emotions get in the way when making a judgement call. Staring at a run of sustained losses? Let emotion get in the way, and you can find yourself throwing good money after bad to recoup those losses. Many people claim to trust their gut reactions, but there’s nothing rational about such a response. If you want to remove emotion from the decision-making process entirely, it’s time to put your trust in automated trading. Algorithmic systems rely on hard data and predetermined inputs, taking emotional bias and sentiment out of the equation entirely.
Is it Time to Embrace Automation?
Automated trading systems bring many exciting benefits, with speed and efficiency gains being some of the most obvious. Armed with the power of automation, algorithmic systems allow traders to scale their operations quickly and at relatively little cost. What’s more, a reliance on hard data and historical insights helps cut emotion out of the equation, allowing for smarter, more consistent trading.
However, automated systems aren’t without drawbacks. They require a high level of technical expertise to create and deploy, along with continued time and energy to remain relevant. If you want to use an automated trading system successfully, you need to commit to continued monitoring and refinement.
