Does Automated Trading Mean Less Risk?

If you’re a trader, you’re always thinking of reducing risks and making your trading more precise and efficient at the back of your mind. Multiple things can go wrong while trading, not to mention you’re not always available to monitor the markets and adjust your strategy as need be. However, automated trading platforms in the UK can help make your trading more convenient and efficient while reducing some risks.

Automated trading involves using pre-programmed computer programs or software to trade on your behalf. This, in some ways, reduces your risks while trading as it eliminates some of the human emotions you’re privy to while trading and efficiently expands your trading capabilities. This piece will examine whether automated trading is less risky than manual trading and some of its pros and cons. 

What is Automated Trading?

Automated trading, also referred to as mechanical or algorithmic trading, is the use of computer programming to automate the trading function. You preprogram the software with your trading strategy by establishing rules and conditions the automatic program can use to enter or exit trades. Once you’ve programmed these conditions, a computer takes over the rest of the function, and all you have to do is monitor how it performs. 

This allows you to convert precise money management rules into an automated system you can use to perform and monitor trade positions. Furthermore, automated trading is prevalent among large brokers and hedge funds, as 70% to 80% of all instruments trading come from such systems in the US Stock Exchange. 

They work by linking the user to a direct access broker and picking instruments based on specific parameters, such as entry price points, and areas of interest, amongst other factors. The automated system then analyzes technical indicators, the price history of the instruments, and your trading strategy to set an entry and exit position for each trade. This process also relies highly on artificial intelligence and machine learning, improving trades’ efficiency and accuracy.

Advantages of Automated Trading

1. Mitigates Emotional Trading

As human beings, we are highly prone to making decisions from an emotional place, even when we think we’re being objective. This can sometimes cloud your judgment and cause you to make less-than-stellar decisions when trading. However, automated trading helps keep your emotions in check by removing that variable and allowing you to rely only on your strategy and rules. 

Furthermore, as the function is automated, you don’t get to question or hesitate to execute trades when the criteria are right. This protects you from some emotional anguish you experience while trading manually. 

2. Backtesting

Automated trading allows you to backtest your trading strategy quickly before implementing it on actual trades. This allows you to hone your trading strategy and improve on what would otherwise be weak or inaccurate aspects. Ensuring what you end up with has a high chance of success in the markets. Backtesting also allows you to try different strategies for the best return on investment conveniently. 

3. Maintaining Discipline While Trading

While it’s easy for you to get distracted or overwhelmed by events in your life, you don’t experience the same with automated systems. Once you’ve set the system, it will perform as expected unless you change certain aspects or the criteria it follows. It also does not get tired or bored, which can sometimes produce devastating effects for traders. 

4. Improved Speeds

Trading is a game of speed, where a few seconds can mean the difference between making a profitable or a loss-making trade. Because automated trading systems are always omnipresent, they quickly execute orders once the criteria are correct, which improves efficiency and accuracy. 

Disadvantages of Automated Trading

1. Over-optimization

Sometimes automated trading platforms carry numerous features and optimization protocols that look good on paper but perform poorly in actual trading. Such systems can unduly raise your expectations only to disappoint you when you have already invested time and money. Furthermore, overthinking and over backtesting your trading strategy can produce an ineffective Frankenstein strategy. 

2. Failures

Like your car breaks down from time to time, automated trading systems are no different. Even though it’s rare, computer programs sometimes fail or record and execute the wrong commands. You will have to constantly monitor your system to ensure it works as you expect.