|Say you’ve had a hard day at work and you need to relax and maybe get some good news. You turn on your computer and find out that you made a nice profit in the market. You were able to do this by just letting the computer make the buying and selling decisions for you. This is not science fiction. Trading firms have been relying on computers to make automated trades for some time now. Is an automated trading computer something you should consider? |
In automated trading systems, little or no human intervention is required. They are based on algorithms, which follow step-by-step methods to make your trading decisions. You still have your data, whether it is news or price levels. You still follow a strategy, which you use to make your trading decisions for entering a new trade or terminating an existing one.
CAN A COMPUTER TRADE?
Computers can be a great benefit to traders who trade large sums of money because using computers allows them to divide large orders to manage the impact that these orders normally have on the market. They do so by breaking the large orders into smaller ones and entering these smaller orders into the market over a certain time frame. Besides just market data, these computers receive and process market news. These computers get a feed from a news service in a format that can be understood and processed. Like any good trader, the computer will use this news to decide if a market move needs to be made. So you have the integration of news and market data deciphered by an unemotional computer that makes trading decisions based upon a strategy, and a strategy alone.
PROS AND CONS
Computers can run any kind of trading strategies you require. Computers can be programmed to exit or initiate a trade at preset conditions dictated by your trading strategy. Computers erase errors caused by emotion. They will risk exactly the percentage they have been programmed to risk. Your exits will be met. The other great advantage of a computer is that it will never get tired. It does not need a raise and it does not need a day off. It can analyze markets constantly with no human intervention needed. Computers can handle complex trading strategies or simplistic ones equally.
|THE CONS |
Constant power is needed in order to run a computer all the time. The big firms will be using not a few computers but a small army of them to do the trading. A dedicated information technology (IT) department is necessary to make sure these computers are up and running. You will also need a constant and up-to-the-second stream of data or a live feed of both market numbers as well as news. Computers do not care about money or profit. Winning and losing trades are handled in exactly the same way without emotion. The strategy will dictate if a computer must change its trading decisions based on winning and or losing streaks. The algorithm it runs needs to be heavily tested before being implemented and used on a daily basis.
The great thing about technology is that self-directed or smaller-scale traders can get the same results for far less money than you would think. On a smaller scale, a trader will have other factors to consider when it comes to using a dedicated computer to make trades. These factors can sometimes be too large a barrier for the trader to overcome.
CAN YOU TRUST A MACHINE?
The second part of the equation is, of course, trusting something automated. There are many traders who for various reasons do not like or cannot allow a computer to have total control of their money. They would rather make decisions on their own using their own strategy. These traders will make quick decisions and enter and exit a trade before any of the stops are met. These traders are more comfortable relying on themselves. A computer does not care about losing or winning streaks unless your strategy tells it to trade differently based upon a long or short losing or winning streak.
Deciding on the type of trading style you use comes down to testing to make sure you are getting the results you want as well as the level of success you are comfortable with. Many software packages will allow you to backtest a trading system and tell you the number of profitable and unprofitable trades. They will also tell you the difference between them.
For example, let’s say one system you tested had 20 successful trades out of 60. On the face of it, this does not inspire confidence, so you decide to dig a little deeper to find out whether the system is truly successful. You do this by looking at the differences between the winning trades and the losing ones. Say the total loss of the losing trades amounted to $500, while the winning trades amounted to $1,200. Clearly, this system is profitable. The winners gain far more than the unsuccessful trades lose.
|LEAVING IT TO THE COMPUTER|
Besides just identifying trade entry and exit points, you have to consider how much you are willing to have on the line on each trade. Once you decide your position size, which depends upon your account size, you will have to figure out if you can turn on your machine and walk away. As mentioned earlier, turning over your hard-earned money to a machine that does not care how much money it makes or loses can be daunting for many traders. If you fall into this category, you can try to blend the two.
Obviously, blending automated trading and human interaction will no longer make it purely mechanical. This will also increase the chance of emotion entering the equation. But you can set the software to identify just the entry and exit points but not let it make the trading decisions on its own. You will have to hit the buy or sell button. I know a few traders who have automated trading systems but make the buying and selling decisions on their own based on the trading signals generated by their system. Psychologically, it still lets them feel in control of the trades, even though they are simply doing what the computer would have done anyway.
FINDING THAT BALANCE
Automated trading may not be for every trader. But if you happen to be the type of trader who likes this idea, you may find the perfect marriage of having your trading strategy employed without worrying about your emotions getting in the way of making money.