Yesterday we’ve focused on the trading plan, which includes a trading system inside. Today, we’ll be talking a bit more about the latest. But not a typical one or even a particular one, we’ll be analyzing what today is known as “automated trading systems”.
Just as it sounds, automated trading systems are indeed trading systems that rely on a certain applied technology that is capable of taking decisions of its own regarding when to open or close positions. Of course, a few prior instructions and configurations are needed for it to work.
In other words, a trader operates as a programmer, telling the system when to open and close trades, using different parameters, which well can be the same combination of technical indicators used by a regular trader on daily basis.
As you can probably imagine, letting a computer in charge while you go for a nap presents a series of advantages and disadvantages. And here there are some of the main:
- Maximize opportunity
You are human and you get tired. Your computer does not. So as long you pay the electricity bill, it will keep running, working and performing in a constant way without interruptions. This means while you go for bed, the trading system can keep eye on the early (too early) Asian hours or even be ready for action when an unexpected event presents overnight.
- Minimize emotions
Another good point is that by letting computers do the work, you are force to step back and look at the bigger picture, leaving aside emotions typically generated and exacerbated by looking at the charts ALL DAY LONG. I am guessing you know what I am talking about.
- Discipline at its best
Following that same line of thought, trading decisions will be based entirely on your commands, which would probably be something like: if “x” is positive and “y” is negative, open a position of “z” for a certain amount. Emotions subtracted, discipline prevails.
- Technology failure
While this is not really common, it can happen and your money is at stake. For such reason, it is important to test and retest your automated trading system before giving it a real chance. In order to make sure technology is on your side, check on your internet provider and allow cheap services. Invest in computer power and a reliable operating system.
- Market failure
Have you ever seen an overnight spike on a chart out of total nowhere? Guess what, that sudden movement in the price of an asset could have been triggered by a technology failure or even a wrong input from a trader. But a machine would not recognized that instantly, exposing you to unnecessarily open or closed positions and therefore, losses.