The advent of the Internet Age, combined with technological advances, paved the way for many innovations in the financial industry. Automated trading is one of these new developments.
While the concept of automating trades has long existed in forex, it was severely limited by the lack of technology in the early days of modern forex trading.
When the internet and personal computers became more commonplace, so did the practice of automated trading.
This practice may hold a certain allure for less experienced traders. However, it’s vital to weigh the pros and cons of relying on trading robots before deciding to use them.
In this article, you’ll learn the advantages and disadvantages of automated trading, and whether using trading robots is right for you.
What Is Automated Trading
Automated trading refers to using computer algorithms and mathematical formulas to guide your trades.
These are programming scripts or codes that you can integrate into trading platforms with API capabilities, such as Meta Trader 4 and Meta Trader 5.
Basically, these scripts are sets of rules that instruct the automated trading program when to execute specific actions based on a set of predetermined criteria.
These automated programs rely on technical indicators to determine the best trading course at a given moment. They often have signal-generating capabilities and use these generated trading signals, as well as market trends and conditions, as triggers for executing actions.
Automated Trading Advantages
As with all innovations, you can benefit from implementing automation into your trades.
For instance, you can execute more trades in less time or even use trading strategies that would otherwise be too complex or time-consuming to implement manually.
These are just some of the advantages you can gain from automated trading.
Below are more examples.
1. It Minimizes Emotion
Emotional bias is a major problem in trading. It can make you too reckless or overcautious in your trades. Either way, letting your emotions influence your trading decisions can affect your potential profits.By letting a computer program execute trades on your behalf, you’re effectively removing human emotions from the equation.
2. It Preserves Discipline
Trading robots can help you remain steadfast in your established trading plan regardless of market conditions.These automated trading programs will follow your pre-set orders to the letter and react to market changes in a logical fashion.
This systematic adherence to your trading plan will help you see your trading strategies to their end.
3. It Improves Trading Speed
Many trading strategies, such as scalping, high-frequency trading (HFT), and intraday trading, rely on the high-speed execution of entry and exit orders.Automated trading programs can react to shifts in market conditions drastically faster than a human monitoring the same market’s movement. This lets trading robots enter and exit trades milliseconds after market conditions meet any of their predetermined criteria for performing specific actions.
4. It Helps You Diversify
Another advantage of using trading robots is that you can simultaneously access and control multiple accounts.Controlling multiple trading accounts at once lets you trade different currency pairs and use various strategies. This effectively reduces your risk exposure and lets you become more adaptive to changing market conditions.
5. It Lets You Backtest
Backtesting allows you to test existing trading strategies on previous market conditions. This lets you see how a given strategy would have fared in a particular trading session and assess the strategy’s viability.Automated Trading Disadvantages
Although using trading robots can be advantageous, it still has its fair share of drawbacks. You would do well to consider these downsides before jumping into automated trading.
1. It’s Vulnerable to Mechanical Failures
Trading robots are computer programs. This means they are vulnerable to disruptions due to internet connectivity issues or computer problems.
When this happens, your trades can become “stuck” in your computer, and you’ll miss out on profits you could have otherwise gained.
2. It Still Requires Monitoring
A common misconception about automated trading is that you can just leave it after the initial setup. However, this is inaccurate.
As previously stated, trading robots are susceptible to mechanical failures. You may experience power outages, internet disruptions, or other issues that may require your immediate attention.
If these events happen while you’re away, you may end up with unwanted and avoidable consequences, such as missing or duplicate orders.
3. It Requires Technical Knowledge
Trading robots are not something that novice traders can jump right into. You’ll need a solid grasp of market fundamentals and a good understanding of programming and software management to utilize its capabilities fully.
Using trading robots without knowing how they work can be detrimental and may result in more substantial losses than gains.
Is Automated Trading for You?
Automated trading is generally not advisable for beginners. This trading strategy requires a more advanced understanding of market dynamics.
Novice traders are encouraged to become more familiar with the markets where they’re trading first. The only way to do this is by manual trading.
Consistently practicing trading strategies through manual trading can give valuable market insights less experienced traders would have otherwise missed.
However, if you’re a seasoned trader, you’re likely familiar with the risks associated with automated trading and have risk management measures in place. In this case, choosing whether to use trading robots is a matter of personal preference.
