PRINCIPLES OF TRADING: AUTOMATING STRATEGIES
An automated trading system basically lets a computer to do the work of a trader by setting certain rules for entering and exiting trades. That computer can trail market movements to pinpoint buy or sell opportunities based on what the user has specified. The moment a trade is placed, any orders for trailing stops, protective stop losses, and profit targets will be created.
Is strategy automation an advantage or a disadvantage?
Downfalls of Automating Strategies
Mechanical Failure - An automated trading is as simple as installing the software, setting the rules, and letting it do your work. But this complicated trading is literally complicated that it relies on different technologies. Also, a trade order remains on a desktop, not server. Therefore, there is no assurance an order will reach the market in case an Internet connection is disrupted. Not to mention the discrepancy between the speculative trade by the technique and the platform converting them into real trades.
Too Much Optimization - Over-optimization pertains to immoderate curve-fitting which generates a trading plan not working in a live trading. Some traders stipulate a great trading plan should never endure downfalls and be close to 100% winning trades. So they map out an almost perfect plan that fails as soon as it is implemented in actual trading.
Monitoring - Even if you set the rules and turn on the computer the whole day, you still needs to trail the automated system. Mechanical failures such as computer crashes, power losses, or system peculiarity can affect trades. It can also undergo anomalies which can lead to duplicate, missing, or unintended trade orders.
Benefits of Automating Strategies
Consistency - Traders often face the challenge of planning the trade and trading the plan, for those who do not plan prepare to fail. Those who ditch the rules are changing the the system’s supposed projection. When trades are automated, consistency is ensured and order-entry mistakes are removed.
Discipline - Everything is automatically done. Hence, discipline is maintained since the computer follows your trading plan as it is. Also, emotion is taken out of the equation since the computer is executing the trade for you.
Diversified Trading - With a trading software, a trader can trade several accounts or implement different techniques simultaneously. The computer can make orders, look for opportunities in various markets, and watch trades in one go.
Faster Order Entry Speed - Expect a trading platform to adapt to varying market situations in a matter of milliseconds. Computers can process orders as soon the criteria are met. Also, entering and exiting a trade within a few seconds can make a great impact in a trade.
Keeping Emotions in Check - People are emotional in nature. While we can never eliminate our feelings, automated trading can help curb the emotions throughout the process. That way sticking to a plan is made easier. Aside from that, you won’t be able to question the trade since the computer adheres to the rules you have set.
Objective Backtesting - This test is applicable to historical market figures figuring out the effectivity of a trade plan or strategy. Rules need to be profound and should have no room for interpretation. Such rules can be tested on historical data before doing it in live trading, enabling you to gauge the average win or lose per trade.
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