Automated Trading: Pros & Cons
Trading is one of the industries that has been affected the most by technological progress. Over the past twenty years, there have been stunning changes, from the introduction of electronic communications networks (ECN) to intelligent order routing and automated trading software. Thanks to trading robots in the modern world, buying and selling assets is completely automated, much more accessible and, most importantly, more flexible. Does this mean that we have finally found the key to solving all the problems of the financial market?
Alas, no, automated trading is not flawless. Let’s take a closer look at this issue and find out whether trading with a robot is worth it.
Automated trading software, or a trading robot, is a programmed trading system that allows you to automatically buy and sell assets according to specified rules. In other words, it is a programmed clone of a trader. It is also called an expert advisor, or EA. What is the reason for the popularity of expert advisors? To answer this question, let’s look at what the main priorities of a trader are.
The most valuable qualities of a successful trader are discipline and self-control. This means that they strictly follow their plan and set of rules, or strategy. And the most valuable asset of a trader is time. It is not infinite, and if you use it to the maximum, the efficiency of your trading will increase significantly.
This is precisely the task of trading robots.They are programmed to follow a set of rules (trader’s preferred strategy) and can trade tirelessly 24/7 all year round. Automated trading software acts as an extended version of algorithmic trading. Its goal is to maximize the opportunities for traders and expand their horizons by trading various assets in several markets at the same time.
The concept of expert advisors in its current form was first introduced in 1949 by Richard Donchian and further developed by John Henry in the 1980s. In the 1990s, tech-savvy traders began experimenting with automated algorithmic trading systems for personal use. Then automated trading software was introduced by brokerages and asset managers to automate their client asset management services. And in 2008, Betterment made robotic trading available to a wide range of users.
How Does Automated Trading Software Work?
Automated trading software uses advanced mathematical models to make fast trading decisions and trades.
Expert Advisors copy classic trading methods. You define a strategy with a set of rules, including what and when to buy/sell (or not), where exactly to trade, the level of acceptable risk, and more. In fact, EA has everything that your trading strategy is based on. This set of rules is then programmed to automatically trade when certain conditions are met. An Expert Advisor can be seen as a tireless, more powerful, digital version of a trader.
Automated trading software can be directly connected to a brokerage account or written in a specific trading platform’s own programming languages (EasyLanguage on the TradeStation platform, NinjaScript on the NinjaTrader platform, MetaQuotes Language on MetaTrader, etc.)
In addition to programming skills, developing software for automated trading requires knowledge of all the disciplines that a successful trader needs: technical analysis, mathematical modeling, statistics, and much more.
Therefore, the development of an expert advisor is a very complex and expensive process. Industry leaders are hiring experienced programmers who are proficient in C++, Java, Python and others to create their own trading systems from scratch. The whole process costs millions of dollars and usually only very large companies can afford it: for example, investment banks such as Goldman Sachs and JP Morgan, or high-frequency traders Virtu, Jump Trading, Optiver and others.
Most brokers are also investing in automated trading systems to provide their clients with access to advanced, feature-rich trading assistants and to streamline their trading process and order flow. Some retail traders also resort to the help of trading robots, developed in-house or available in the public domain.
What Does Automated Trading Software Do?
Essentially, automated trading software does the same thing as any trader, only faster, more reliable and more efficient. Why is it so? Because the automated system does not experience emotions and trades exclusively according to the established rules. Her only strategy is to buy low and sell high.
In other words, the software is constantly looking for financial instruments that are undervalued or overvalued for any reason, be it fundamentals or market error. In the process of searching for a suitable financial instrument, the system analyzes many factors.
Depending on the strategy set by the trader and the level of risk, the Expert Advisor can take into account anything: from fundamental indicators, news and trends in social networks to indicators of technical analysis, liquidity, volatility and many other factors.
AI-powered expert advisors can make trades indefinitely. They stop only if given instructions are met, such as a profit target, a trading limit, or something else.Although all of the above sounds like expert advisors are the key to solving all the problems of the financial market, in fact they have many drawbacks: from the high cost and complexity of the device to unpredictable and sometimes overestimated efficiency.
What Is the Market Share of Automated Trading?
Let’s take a closer look at the history of the distribution of software for automated trading. With the advent of the new century, the process of continuous development of trading robots and their distribution on the market began. They changed not only the approach to trading, but also the principle of exchanges. Today, this industry dominates the global financial market. According to a 2017 JP Morgan report, just 10% of trading is done through the traditional way of selecting stocks to invest, and the rest is an automated process.
According to another report, the cumulative annual growth rate of the global algorithmic trading market between 2020 and 2025 is expected to be 3.5%. The authors of the study (Orbis Research) also predict stable growth of the trading software market at about the same pace. Meanwhile, Business Wire comes up with even more staggering numbers: they estimate a compound annual growth rate of 10.6% from 2018 to 2026. These data indicate that today’s markets are dominated by automated trading systems, which account for 70 to 85% of all trading.
Robotic Trading Risks
Now let’s take off our rose-colored glasses and look at robotic trading assistants from a different angle.While expert advisors have many benefits, don’t think they are the answer to everything or the holy grail in the trading world. In fact, EAs represent a significant risk for those who are just starting to trade or who do not understand the technical side of the market.
Fraud
While searching for the perfect automated trading system, you will come across many offers that promise extraordinary profits at a low price. In most cases, these are scammers who will eventually disappear along with your money.
Remember that developing a good trading system is very expensive. Imagine decades of cumulative experience of the development team. As a rule, it includes statisticians, mathematicians, traders, programmers, risk analysts and many others. Now add here the know-how and hours of work dedicated to the development of the system. Will these specialists sell their labor at a low price?
Of course not. Automated trading systems are by definition expensive: they are sophisticated intellectual property designed to make money. It can’t be cheap. To better understand the mechanism, think about what unites successful trading companies? Answer: they keep their developments secret and use their algorithms only for internal use, since this is the basis of their competitive advantage.
To make sure that you have chosen a high-quality, reliable and proven trading system, carefully study the user agreement, request technical information and get acquainted with all the details of how the software works. It also doesn’t hurt to read reviews from trusted sources: don’t trust the first Reddit user you see or obviously dubious reviews.
Be aware that reliable programs usually offer a free trial period. First you need to develop a strategy, after which you can activate the trial version to see how it applies and fulfills your settings. If everything is in order and there are no alarms, you can switch from a trial version to a paid version or purchase a license.
False Expectations
Don’t count on an automated trading system to make you a millionaire. After all, it is only as effective as the parameters and rules you set are good. So if the performance is lame, do not give up right away – try to adjust your strategy first.
Of course, you are not the only culprit behind the inflated expectations. Some service providers advertise their trading robots with 80-90% success rates. It must be understood that even if this is the case, their assessment is based on past performance. The market is in constant motion, so past data can easily become irrelevant for future price analysis. Remember, there is always a risk that the chosen system will not meet the expectations of the promised performance.
In addition, it is worth noting that even the best AI-based trading systems implemented by the world leaders in the hedge fund and trading companies market are not flawless. No matter how far modern technology has gone, it is still beyond the control of the extreme complexity of the financial market.
Speed
In today’s environment, profitable trading opportunities are fleeting. Therefore, in order to have time to use them, you must always be in the forefront. To do this, you need a well-thought-out trading system and a fast connection. In other words, a high-speed system.
The easiest way is to use the services of a company that offers a back-end system for automated trading with an infrastructure located close to the exchanges you intend to trade on. This will provide you with faster and more reliable order execution.
Such a system will help avoid problems with slippage or time discrepancy, which often puts a spoke in the wheels of traders, not allowing them to achieve the planned profit. Slippage is the gap between the moment at which the trading system marks the entry/exit point and the moment the order is actually executed. In fact, this is the difference between the expected and actual price at which the transaction was made.
To understand how important speed is in today’s trading, just imagine that high-frequency traders spend millions of dollars a year on collocation rights in order to reduce the execution time of their orders by a fraction of a second, because in this game every millisecond counts.
Although no system for the general public can match the infrastructure of high-frequency traders, your options should not be limited to your home Wi-Fi network.
Complexity
In theory, it may seem that automated trading software facilitates the process and is an ideal solution for a novice trader, but in reality the situation is somewhat different.
First of all, consider whether you really need an expert advisor. Weigh all the pros and cons. Keep in mind that although EA saves you the hassle of manual trading, it follows your own strategy.In addition, if you implement an automated system directly into the broker’s terminal, some programming skills may be required, and those who do not have the necessary knowledge will have to pay the programmer to implement your strategy, as well as for further maintenance in case the need arises.
Whether you choose to subscribe to a paid program or develop your own, you will have to pay for it. Keep this in mind when deciding whether to use an expert advisor. In addition, if you are a beginner trader, it is worth practicing manual trading anyway. So you will learn first hand how financial markets work, get acquainted with all their mechanisms and note for yourself what to look for when developing an EA.
In the end, it is very important to understand that the success of a trader depends on his strategy, and not on how quickly it is applied. Automated trading systems follow your instructions, so the first thing to do is to set them up properly.
Pros and Cons of Automated Trading
Despite the misleading impression of the impeccability of automated trading systems and expert advisors, they have not only advantages, but also significant disadvantages that must be taken into account when choosing between automated and manual trading. Let’s look at the most important aspects.
Pros
Making decisions without emotions
Quite naturally, one of the biggest challenges faced by beginners and some intermediate traders is self-control and discipline. As we have said, successful traders are distinguished by the ability to unwaveringly follow the established plan, no matter what.
The advantage of a trading robot is that it will not make irrational decisions after a couple of unsuccessful trades. On the contrary, he will continue to follow the programmed rules, not succumbing to pressure, greed, fear, the syndrome of lost profits and other emotions inherent in live traders.
High speed
Making transactions using an automated system is much faster than with manual trading. The fact is that a computer is able to respond to market signals in less than a second, while a person is simply physically unable to keep up with such a pace.
In addition, after opening a position, stop losses and other orders are usually placed, which require additional time to manually place. Such delays often result in a partial loss of profits. The sooner you enter into a deal, the more favorable the conditions will be.
Implementing complex trading strategies
A good trading system allows you to include different parameters and data sources in the strategy. So, you can create a multi-dimensional strategy that takes into account market sentiment indicators, technical analysis signals, social networks, fundamentals (earnings, price / earnings ratio, etc.), trading volume, asset information and much more, and all it will be taken into account at the same time.
If you try to take all these points into account when trading manually, it will take too much time and you may miss the opportunity for a successful trade.
More trading opportunities
We have already discussed how difficult day trading is, given the need to open and close multiple positions in one trading session. Now imagine what it’s like for day traders to trade multiple markets or multiple assets at once.
In turn, trading robots provide an opportunity to take advantage of arbitrage trading, which can significantly increase your performance. In addition, people often miss out on potentially successful trades, while an expert advisor seizes every trading opportunity.
Cons
Technical risks
Despite the fact that computers are much more stable than live traders, it is worth noting that they carry certain risks. Most of the risks are associated with situations where the system is running locally and there may be power outages, technical failures or loss of Internet connection. Always keep these pitfalls in mind when considering switching to trading with an expert advisor.You don’t want to get stuck in the middle of a trade due to technical issues, do you?
Far from flawless
Many people think that an expert advisor will make them a trading legend. However, the point is that automated trading systems are only as good as the strategy they are programmed to follow. It can be difficult for AI-powered trading robots to beat benchmarks and even their human counterparts.
One interesting study on the subject concluded that robotic advisors are a valuable source of alternative information for investment analysts. This means that robots only complement people, but in no way replace us.
Robots need to be watched
Although the robots are automated, they cannot be left unattended. Connection interruptions, technical errors, system crashes, and many other problems are rare, but they can interrupt the work of an expert advisor and you will lose money. In addition, you need to take into account the likelihood of market and trading anomalies when it is necessary to intervene in the system and correct it.
Let’s not forget that it was the trading robot that made the Flash Crash worse in 2010, and that Knight Capital lost $440 million due to the trading crash.
Robots are expensive
Developing or subscribing to an automated trading system can require a significant investment. Be sure to come up with a plan for optimal target profit and acceptable risk to cover your costs and ensure economic viability.
Also take into account the frequency with which you are going to trade.If you only plan to make a few trades per day, manual trading may be more suitable for you. And if you want to trade constantly (dozens of trades a day), an expert advisor can be a very useful tool.
For the most part, this applies to retail traders. Prop trading companies, large investment banks and asset managers who use automated trading systems benefit from economies of scale, which significantly reduces their costs.
Should You Consider Using Automated Trading Software?
In short, yes, of course. Consider this if only to get familiar with the concept and see if automated trading software can be of benefit to you. However, don’t rush to jump on a train just because it’s something new and trendy. The Expert Advisor may seem like a cool new toy, but it’s not for every retail trader.
It doesn’t matter if your trade is done automatically or with a mouse click, what matters is how effective your strategy is. If you think it’s working great and want to scale up, then it’s certainly worth considering using an expert advisor.
Also, only use automated trading software if you can afford a good, time-tested program. Check out the detailed documentation and find out what level of service the company offers: this includes regular updates and any technical features that are important to you. Don’t buy a pig in a poke.
Also don’t resort to using EA if you can’t keep track of it. Successful traders monitor the actions of their Expert Advisor, make regular adjustments, and intervene as needed. As shown in Market Wizards: Conversations with the Best Traders by Jack Schwager, most successful traders are actively involved in their trading systems rather than sitting around eating popcorn.
Of course, the decision is yours. However, we believe that after reading this guide, you already know the answer.
FAQ
Is it possible to independently develop software for automated trading?
Yes, it is possible if you have the necessary programming skills. However, this is not the best idea if you are not an experienced programmer, as trading systems are among the most complex computer programs. After all, you want her to make money for you, so if you’re not 100% confident in your abilities, don’t do it yourself.
How much does good automated trading software cost?
It all depends on whether it is developed from scratch or you take a ready-made program, as well as the availability of maintenance fees and other ongoing costs. Let’s just say that these systems are not cheap, and if you see an offer of an impeccable trading robot that will allow you to quit your job and swim in money for only $100, just pass by.
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In the near future, Boosty Labs will begin providing automated trading solution development services.