#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.
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.
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.
- 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.
- 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!