Automated Trading

#2 Let’s briefly discuss Automated Trading.

Automated Trading is known by several terms. You may hear it referred to as “algorithmic trading,” “mechanical trading,” even “system trading,” etc. This type of trading allows traders to use specific rules for entering and exiting trades automatically carried out with computers, tablets, or phones. It is reported that 70% to 80% of the trades on the US Stock exchange are done with automatic trades.

The biggest advantage of Automated Trading (no matter what you prefer to call it) is that this type of trading takes the emotion out of the equation and, therefore, the FOMO. (fear of missing out)

Entry and exit rules can be established depending on the savvy of the skillful, knowledgeable programmer; simple settings such as moving averages (*crossovers) or a more complicated approach requiring the knowledge and perception of programming language unique to the user’s trading platform.

(*Crossovers – A crossover happens when indicators overlap each other. Seeing them helps determine and confirm patterns and trends in trading, such as breakouts and reversals. Golden Crosses and Death Crosses are two typical examples.)

What Is a Golden Cross?

As you can see in the chart below, the 50-day moving average is showing a bullish signal. This 50-day moving average crosses the long-term 200-day moving average to the upside. The point of crossing is called a Golden Cross and is a Bullish Breakout Pattern. This would indicate a bull market coming, which is fortified by high trade volumes.

Chart from Trading View

As you could guess, a crossover with a distinct downward movement indicates a “death cross” and would mean a “bearish” market. Typically trade volumes would be lower as well.

Keep in mind that indicators are delayed and, therefore, cannot accurately predict with certainty. Often the Golden Cross indicators are wrong, and traders who jump in placing a long right away could easily land in some near-term hot water. It is important to remember that a potential Golden Cross may not actually manifest and should always be confirmed by checking other signals. Leave the hot water for your intentional bath!

If a Golden Cross does occur, the 200-day moving average is considered a significant “support level.” In the case of a Death Cross, the same 200-day moving average is considered a “resistant” level. Either Cross indicates a trend change but unfortunately, a trend change that has already happened.

Trade “Rules”

On the trading platform you are using, you could choose to take advantage of that trading platform’s “wizard,” which would allow you to tailor your portfolio-building strategy. Choose from a list of “technical indicators” to compile your set of rules. (Technical indicators are Socratic or numerical calculations established by the current price, volume, and open interest- which is the number of futures or options unsettled on an asset.)

Often, many traders prefer to select their own custom set of indicators and strategies. Although a bit more work, the trader can ask the programmer to develop the technique, which will allow for more flexibility. The programmers may or may not fulfill the task. One thing we all have to realize, though, is there is no perfect strategy that ensures success.

What are the Advantages of Automated Trading? Here are a few:

Minimizes Emotions (FOMO)

  • Automated Trading eliminates emotions from the trade decisions, so the FOMO (fear of missing out) or other fear-based or indecisive hesitation isn’t part of the equation.

Backtesting

  • When a system is designed according to a trader’s wishes, each rule should absolutely take away any latitude for interpretation. The Automated Trading System cannot decide what trades it wants to try as it operates from the pre-determined set of rules. Therefore backtesting grants the trader the opportunity to check a trading idea and assess the strategy to determine if it is following the idea of what a trader predicts to gain (or lose) in the trade.

Ensures Discipline

  • Even in volatile markets, Automated Trading can result in Discipline. After all, it’s virtually hands-free! Once the rules are set, the trading can begin, and by the nature of the system, it becomes very disciplined. Errors such as intending to sell 100 assets when erroneously 1000 assets are entered are pretty much eliminated.
  • There really is no such thing as winning 100% of the time. Losses can be expected. However, those losses can be distressful. If trading manually, a trader may be so traumatized by losing a few trades that they skip the next trade. IF the next trade could have been a win, then the trader has shattered that opportunity. With Automated trading, there is greater consistency.

Improving the Speed of Order Entry

  • With fast-paced trades and constantly changing market conditions, a Manual Trader is slower to react, while Automated Traders can spawn orders quickly when the right criteria are met. The ability to get in (or out) of the market quickly could greatly impact a trade’s outcome.

What are Some of the Downfalls of Automated Trading?

System and Mechanical Failures:

  • The fact is, Automated Trading is not without its drawbacks. Based on the type of trading platform you utilize, a trade order may initiate from your personal computer. What if your internet dropped out, your local service is interrupted, or worse, your computer crashes? Likely, the intended trades would not get entered into the market. And what about the “potential trades” made from the strategy you have created waiting for input? Because you were not online to manifest them into REAL trades, you could lose out! (this is another good reason to keep your trade size amounts small.)

What About Monitoring?

  • Any trading should be constantly monitored especially Automated Trading. It is highly plausible for technology to fail, such as connectivity issues, electrical failures, system quirks, and even computer crashes carry a strong likely hood to happen. Anomalies such as missing and duplicate orders can happen, needing your immediate and full attention to curb any potential losses with haste! If you are not there to fix the issue quickly, you could lose a lot!

Over-Optimization or excessive “curve-fitting”

  • Suppose your strategy looks great on paper, but it doesn’t perform so well in the markets? Could it be that you have over-optimized to the point that your plan turns out to be very fickle in the marketplace? If you are monitoring closely as you should, you could easily see what’s happening and adjust your strategy accordingly. BUT, only if you were there watching, right?? Traders often mistakenly assume their particular trading plan will yield them 100% profit all the time. In reality, this does not happen not should it be expected. However, monitoring the trades would certainly enable the trader to curtail some of his losses.

Avoid the Scams

We would hate to see anyone lose even one penny to scammers and hoodwinkers. Many unscrupulous people seem to work harder trying to scam someone than willing to work to earn the right way!

Therefore this seems a good time to remind Compumatrix members of a few important things to keep in the thoughts:

  • IF it sounds too good to be true, it probably is not!
  • If someone asks or requires you to “pay” first, question and investigate!
  • Do your own research, not relying on someone else’s opinions.
  • Look on third-party sites and comb for testimonials and references.
  • Keep your asset holdings to yourself!! This is VERY important for you and your family!
  • What the adage? Measure twice, cut once? Well, questions twice, trust once!

About the author

Born in Illinois and the third oldest child of 10 children. Gail learned many lessons in life that would serve her well in her future. Patience, sharing, compassion, understanding, love, and acceptance were a way of life. Family is significant to Gail as a mother of three herself.
Gail lives by the motto "live and let live," and she takes pride in helping others. Educated, yes, but believes life is the best teacher and learning depends highly on an open mind.

Comments

  1. Oh yes, I agree with the “question twice, trust once”! Especially in something like the ever-fluctuating financial/trading markets; and even with Automated Systems, this rule applies. You’ve followed up your article on Manual Trading nicely with this one. While the stakes as far as FOMO and emotional reactions are higher with Manual Trading, it certainly does not mean the automated systems don’t have their own risks! Thanks for another great blog!

  2. Once again a very good explanation of the pros and cons of automated trading. Agree there is no substitute for doing your research. Always remember that if you trade you should be in for the long haul, not a quick buck which will often end in losses. 2 key principles diversify your asset type and their geographical location.

  3. what a great start to my Friday — always question -?? no matter who what where when — and Trust is earned in my life — have won many but also lost and even thru the wins — there are always moments — thank you for a great analysis on auto trading also — with a smiling part on Life in general and all You do around Compumatrix —

  4. Well, you have done it again! This is a great comparison on automated trading that really hit home. Several years ago I did some trading on the stock exchange. All of the pitfalls were learned very quickly when dealing with real funds. Being new to trading FOMO was a powerful emotion that was hard to kick. That was an experience that taught me long-lasting lessons. Your last six points are what each member needs to print out and place where it can be read daily.

  5. Thank you Gail,for teaching us very well about automated trading,automated trading is profitable, if we keep a few things in mind,understand the right risk management techniques, you mentioned six points are really very important,very true,measure twice, cut once, questions twice, trust once.

  6. Great follow-up, Gail to the trading information. I am full of admiration for the people who attempt to follow all the instructions and dip their feet into the trading waters. FOMO would have a strong grip on me – not so much losing out, but more losing because of lack of necessary knowledge! I concur with Erline – the points under the heading avoiding scams should be seared into our minds before going forth with the trading!

  7. Thanks again, Gail for a great blog! As I become more educated about trading, the more I desperately want the help of a Virtual Assistant. I may be able to do some minor trades occasionally, but do not expect to learn and comprehend all that is involved in the trading market.
    It is good to have an understanding of the process, but that is about as deep as I wish to delve into.

  8. Thank you Gail for the informative article. I have no intention of trading although I am hoping my VA will have the know how if I should decide to use him/her. I’m not really looking to increase my portfolio I just want to be able to access what I have and continue to put a percentage back into the business to keep Compumatrix moving forward for all.

  9. Thank you, Gail. Automatic trading is very good. But here you need to find a good robot for automated trading. And this is very difficult to do. All the robots I tried unfortunately ended up losing all my money. You can, of course, try to trade yourself, but this is also difficult. You have to study a lot and monitor the market 24 hours a day.

  10. Thank you all for your kind words of support. You have to be careful when you trade, even with a bot, as Alexandr says. They only trade as they are programmed to and can absolutely lose instead of gain funds without human intervention. It is HIGHLY suggested that minute amounts of trades be put into orders so that if something goes haywire, the bot can be stopped before much damage can be done.

  11. Thank you Gayle for this information on automated training! This is an area that I have been wondering about, but have not made the effort to do any research to this point. Lots of good information in the article. One thing that really stuck out to me was that if you do use this method, you still have to monitor the trades. Guess if you are a busy person you just need to pay someone to trade for you, if you expect to effectively make any money!

  12. Thank you Gail for the great informative blog. I had kind of ruled out using automated anything and just wanted to wait to see how others acted. But the more you talk about it, the at least similar it sounds and would be something nice if you have no clue what your doing.

  13. Great info again Gail. Automated trading is a great way to go to take the emotion of the game. Set it and let it work. It has been said many times that automated trading and “Bots” will eventually replace the stock broker or cryto trader. I see them more and more often. And with 70 – 80% of market trade being automated… I think it is well on it’s way.

  14. Now this I would not do! Or not without a tutorial and clear understanding. While manual trades make sense to me, the automated ones are beyond my comprehension. So I will leave this to ‘real traders’. I think we maybe did a variety of this with one of the beta tests, with some scaled trades. But we merely followed directions. It would take quite a bit of knowledge and experience, me thinks, to do this on one’s own!

  15. Thanks for this informative blog Gail. I learned again some things about trading. I read some articles about automated trading and learned that it does not always go well. I am happy that Compumatrix introduced the Virtual Assistants who can do the trading for me because I think I will never do well when I do it myself.

  16. Thank you Gail. Its quite interesting on the basis of the automated/algorithmic/mechanical or system trading. I’ve seen quite a number of young people using the Meta trader 4 to place trades based on the prediction of the stock/forex/crypto market. Consistency in trading where discipline is put to work, works with automated trading. Thank you for the heads up on both the pros and cons of automated trading. I’ve met scammers whom I’ve fallen prey of without having thought twice nor done my thorough research. Questions twice, trust once is key!

  17. “If it sounds too good to be true, It probably isn’t!” That sums it up for me because automated trading is all about calculated risks which when done properly will lead to euphoric celebrations in profits. With the correct algorithms in order, the right moving averages and proper risk management, the automated trading system put in place will definitely work for you without a doubt. Key factor here is to ensure that the right algorithms are used and monitor the system. With proper discipline, Success is paramount!

  18. I love automation in marketing. There are so many things that can be set up and automated for businesses. BUT, I am not sure about automated trading. I get that it is going to be more objective, perhaps and takes the emotion out of it, and that seems good…. but it also seems potentially risky. Research does seem essential and trust will be key. Trusting in the system that you are using and working with, and finally monitoring. Each person will need to understand how to monitor their automated system to ensure that it is working in line with their goals and values…..

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