Many participants of financial markets from investment banks and hedge funds to private traders experience a genuine interest in the opportunities of automated trading. Everyone is tempted by the idea to set up a robot that will then constantly earn you money. Could such a plan of creating an "eternal" source of financial success work? In fact, it turns out that the alleged exceptional efficiency of modern automation is overstated, and the reason is the human factor. What kind of fatal errors are often made by traders who rely on automation in their work?
The sin of negligent attitude to mechanical failures
The theory of automated trading is insidious in its simplicity: set up the software, set the rules and monitor the trade – how hard is that? But this is a complex approach to trading, and it is far from being error-proof.
Depending on the trading platform, trade orders can be placed initially on the computer before they get to the server. Then, in the event of an Internet connection failure, the orders may never reach the market. Also, there may be discrepancies between the strategy requirements and the specifics of the platform on which you are trading. In other words, such systems need a fine and flexible tuning.
The sin of illusory comfort
Of course, it would be great to simply turn on the computer and do other things or relax in a lounger with a cocktail, but modern automated trading systems still require vigilant monitoring. This is due to mechanical failures and system errors. Otherwise, there are risks of running into system anomalies that can lead to erroneous transactions, as well as their absence or duplication. If the system is controlled, these events can be quickly detected and resolved.
The sin of excessive optimization
You can configure the strategy for exceptional results based on the historical data on which it was tested. And many traders really think that their task is to have a trading plan that provides 100% profitable trades and never has a drawdown.
Thus, the parameters are corrected for this "almost perfect" plan, which does not fully work in the real market. The very correction "for the wind" should serve as an unforgettable guide for the tuning. Do not chase profit, but limit the risks of drawdown!
The sin of conflict with fundamental factors
Today it is difficult to say that historical price data reflect comprehensive information about the markets. Given the fact that information about important world events spreads over the Internet in a matter of minutes, we cannot be 100% sure that the next news will not affect the dynamics of price movement so that it will force the system to accept anomalous and counterproductive decisions.
The sin of lack of adaptability
It's about the mechanism of adaptation to abnormal changes. Autonomous trading systems are simply a set of static rules. More advanced systems have learned to adapt and change based on other fixed rules and processes for later customization.
However, the forces that influence the currency market are neither static nor fixed. For this reason, many signals predicting that the trend may change can be interpreted by the system as internal reference points within the current trend, or vice versa.
The sin of an all-consuming hope in automation
For some traders, automated trading is the Holy Grail. Its mechanisms may still be imperfect, but at least they stand at a distance from the unhealthy political expanse that most fundamentalists stick with.
This is the logic of almost every second automated trading lover who is more inclined to argue about the exceptional qualities of his system than to obtain real results. A healthy trade is somewhere between the foundamental and technical analysis - at the junction of extreme news awareness and a solid technical background.
The sin of high cost
Automated trade means:
- purchase and maintenance of servers;
- services of outsourcing specialists;
- purchase of ready-made experts for analysis and study of individual algorithms and code sections;
- expansion of basic computer facilities;
- continuous broadband Internet access to cloud computing systems, etc.
One should also take into account the fact that the ones most successful in the market are innovators whose systems are able to outrun competitors in terms of speed or self-learning, the potential of which is being mastered today by neural networks.
This makes traders spend time and money on research and projects that are not always successful and cost efficient. In other words, the sequential automation of private and global trading processes requires substantial long-term investments.
How to redeem all these sins?
Despite the many ramparts of automated trading, it is quite possible to benefit from it. The trader who has chosen this path can achieve their goals using the following virtues:
The virtue of reliable technical support
It is modern software and computer and network infrastructure that are the strong foundation necessary to turn ideas into algorithm trading into reality.
The virtue of sequential learning of neural networks
This factor requires considerable resources and competent investments, which, however, will be repaid a hundredfold. If the system takes into account past experience, then each time, completing a puzzle of information before the transaction, it will make fewer mistakes.
The virtue of patience
Like any other business, automated trading will take a long time to establish its proper operation. The trader will have to be patient not just for months, but for years.
The virtue of multifunctionality
A trader should not rely solely on an adviser. They need to develop the flexibility of the mind instead of dwelling on the skills already learned. Continual improvement of knowledge in technical analysis and due account to the news effect which gives impulses to the market, will yield generously even in automated trading.
The virtue of competent setting
Without testing and optimizing advisors, it is impossible to improve the trading strategy. The proper implementation of this process will avoid the annoying failures of the work of experts in the future.
The virtue of ingenuity
The trader always needs to develop, studying the current modern novelties of algorithm trade. You cannot be complacent when you receive the first positive results. Trade is a long way in which you need to continue to improve your trading strategies.
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The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.