Opinion about automatic trading
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Automatic trading is attracting more and more traders but is it a good alternative to manual trading? Since the objective of any trader is to earn money, the only question to ask is which of the two methods offers the best trading performance. To answer this question, it is important to understand the advantages and disadvantages of automatic trading.
The main advantage of automatic trading is the automation of your position entries and exits. This allows you to spend much less time in front of the screen and therefore have more free time. It is therefore an advantage of convenience that is given here.
The other great advantage of automatic trading is that your trading strategy works 24 hours a day. All buy/sell signals are used. You no longer miss any trading opportunities. If your trading strategy is a long-term winner, automatic trading enables you to generate more performance. Effectively, if, for example, 2/3 of your trades are winners with your strategy, the more trades you open, the more you win.
To achieve the same performance with manual trading, you either need to spend more time trading or increase the size of your positions. But in the latter case, the increase in leverage induces a greater risk. From this point of view, automatic trading therefore wins the trading performance match hands down.
Emotions are one of the main factors that causes losses for novice traders. There are emotions related to greed (appetite for profits) and euphoria (feeling stronger than the market after a series of winning trades). There are also emotions related to losses such as frustration, anger, depression, fear of losing and panic.
With manual trading, you are confronted with all of its emotions. This is therefore a factor that can significantly affect your trading performance. However, all emotions related to losses are often the result of the absence of risk management in your trading strategy. If you apply strict money management to all your trades, you are no longer subject to these negative emotions. Regarding emotions related to winnings, no trader is immune.
With automatic trading, you are only confronted with emotions related to winnings. Effectively, if you start making money, you may be tempted to increase the size of your positions to earn more and more, as is the case with manual trading. Concerning the emotions related to losses, you do not suffer them since you are not in front of your screen. However, you must apply the risk management rules to your trades or risk heavy losses.
In terms of emotions, automatic trading is still an advantage, even if we can qualify it. Effectively, in both cases you may or may not apply risk management and want to earn more and more by taking more risk.
For a trader who has no experience in manual trading, automatic trading seems to be more efficient. Effectively, it is only by trading that you realize the numerous limitations of automatic trading:
- Stop loss management: With automatic trading, placing of a stop loss is automatic. However, depending on the configuration of the price chart, the positioning of a stop loss needs to be adapted to either limit losses or follow the movement. A stop loss has a significant impact on trading performance. Novice traders tend only to focus on winning trades but performance is strongly impacted by the ability to minimize losses. This is often what makes the difference between a winning and losing trader. In my opinion, stop loss management is more important than the trading strategy itself. Automatic trading does not allow for any flexibility in this respect. Movement of a stop loss must follow logical rules, namely, stop loss at x pips, movement after x time if the trade is positive, etc.
Technical Analysis: Automatic trading does not allow you to base your position entries and exits on chart patterns, trend lines or even simple horizontal resistance and support lines. With automatic trading, your strategy must be oriented towards technical indicators. If this is not the case, it is often impossible to transcribe your analysis into an algorithm. Technical analysis does not follow logical rules. Nothing can replace your eye for detecting chart patterns and the different plots on a price chart.
- Strategy development: The big mistake for a lot of automatic trading users is believing that once the strategy is developed, there is nothing more to do. In this case, you will be ruined. Whatever your type of trading, you need to develop your strategy. It's easier to see this with manual trading because you can see changes in market conditions in real time. If you use a trading algorithm, you will clearly not be monitoring your account every day. So you can accumulate losses faster before you change anything.
Moreover, few people touch their automatic trading strategies due to a lack of technical skills or the influence of the word ‘automatic’, which implies that there is nothing more to do once a strategy has been found. Most traders look for a miracle algorithm and then hope to make a fortune without having to do anything. Whether you do manual or automatic trading, you need to spend time developing and monitoring your trading strategy. There is a reason that banks and hedge funds pay mathematicians a fortune to keep their trading algorithms performing well. It's the same for a trader. It must adapt to market conditions.
- Experience: Only by practising can you gain experience. This applies to all areas. With automatic trading, it is the algorithm that does everything for you. Unlike humans, they do not learn from their mistakes. Errors are corrected only if the developer changes the code. In addition, if you do automatic trading, you will spend your time on sites that promote this type of trading. You stay in a bubble that only has coders. You don’t go to sites with traders who trade manually and whose experience is valuable to help you improve your trading quickly and become more efficient.
Whether you do automatic or manual trading, developing your own trading strategy is the best way to optimize your performance. Develop a strategy that adapts to your investor profile and especially one that you understand. If you develop your strategy (which is essential), you fully understand the logic of the algorithm, the position entries and exits.
If you have the technical skills, you can code your strategy yourself. If this is not the case, have it developed by an expert. There are a lot of sites including ProRealCode which offers to develop your algorithm for free if you share it with the community.
In any case, never buy a trading algorithm on the net. That will surely be a scam. If someone sells you an algorithm, it's because it doesn't work otherwise they wouldn't need to sell it. It’s as simple as that. Trading robot vendors always show you positive backtests but you should know that this is a customer trap. With any strategy, I can show you a positive backtest. All you have to do is choose the right period for the backtest. Any strategy (or almost any strategy) is a winner at some point. Develop or have developed your own trading strategy. You can also test the free strategies on the net.
Automatic trading has many advantages, there is no doubt about it. It largely eliminates emotions and maximizes the performance of your strategy through 24-hour trading. This can be very profitable and high frequency trading is the most perfect example of this.
However, at the level of an individual who does not have the technical resources of hedge funds and banks, automatic trading can be a trap. It is essential to change your strategy regularly and you must not fall into the money trap, which you think is easy. Work is just as important as manual trading to develop your trading strategy.
I have been a manual trading enthusiast for many years. I have tried automatic trading several times and I have never been able to code all the elements of my trading strategy. In many cases, the management of stop losses and position exits does not follow a rule precise enough to be coded. Coding my strategy would therefore mean making it much less effective.
And what do you think of automatic trading?
Can the benefits of automatic trading improve your performance?
The main advantage of automatic trading is the automation of your position entries and exits. This allows you to spend much less time in front of the screen and therefore have more free time. It is therefore an advantage of convenience that is given here.
The other great advantage of automatic trading is that your trading strategy works 24 hours a day. All buy/sell signals are used. You no longer miss any trading opportunities. If your trading strategy is a long-term winner, automatic trading enables you to generate more performance. Effectively, if, for example, 2/3 of your trades are winners with your strategy, the more trades you open, the more you win.
To achieve the same performance with manual trading, you either need to spend more time trading or increase the size of your positions. But in the latter case, the increase in leverage induces a greater risk. From this point of view, automatic trading therefore wins the trading performance match hands down.
Does automatic trading really eliminate emotions?
Emotions are one of the main factors that causes losses for novice traders. There are emotions related to greed (appetite for profits) and euphoria (feeling stronger than the market after a series of winning trades). There are also emotions related to losses such as frustration, anger, depression, fear of losing and panic.
With manual trading, you are confronted with all of its emotions. This is therefore a factor that can significantly affect your trading performance. However, all emotions related to losses are often the result of the absence of risk management in your trading strategy. If you apply strict money management to all your trades, you are no longer subject to these negative emotions. Regarding emotions related to winnings, no trader is immune.
With automatic trading, you are only confronted with emotions related to winnings. Effectively, if you start making money, you may be tempted to increase the size of your positions to earn more and more, as is the case with manual trading. Concerning the emotions related to losses, you do not suffer them since you are not in front of your screen. However, you must apply the risk management rules to your trades or risk heavy losses.
In terms of emotions, automatic trading is still an advantage, even if we can qualify it. Effectively, in both cases you may or may not apply risk management and want to earn more and more by taking more risk.
What are the limits of automatic trading?
For a trader who has no experience in manual trading, automatic trading seems to be more efficient. Effectively, it is only by trading that you realize the numerous limitations of automatic trading:
- Stop loss management: With automatic trading, placing of a stop loss is automatic. However, depending on the configuration of the price chart, the positioning of a stop loss needs to be adapted to either limit losses or follow the movement. A stop loss has a significant impact on trading performance. Novice traders tend only to focus on winning trades but performance is strongly impacted by the ability to minimize losses. This is often what makes the difference between a winning and losing trader. In my opinion, stop loss management is more important than the trading strategy itself. Automatic trading does not allow for any flexibility in this respect. Movement of a stop loss must follow logical rules, namely, stop loss at x pips, movement after x time if the trade is positive, etc.
Technical Analysis: Automatic trading does not allow you to base your position entries and exits on chart patterns, trend lines or even simple horizontal resistance and support lines. With automatic trading, your strategy must be oriented towards technical indicators. If this is not the case, it is often impossible to transcribe your analysis into an algorithm. Technical analysis does not follow logical rules. Nothing can replace your eye for detecting chart patterns and the different plots on a price chart.
- Strategy development: The big mistake for a lot of automatic trading users is believing that once the strategy is developed, there is nothing more to do. In this case, you will be ruined. Whatever your type of trading, you need to develop your strategy. It's easier to see this with manual trading because you can see changes in market conditions in real time. If you use a trading algorithm, you will clearly not be monitoring your account every day. So you can accumulate losses faster before you change anything.
Moreover, few people touch their automatic trading strategies due to a lack of technical skills or the influence of the word ‘automatic’, which implies that there is nothing more to do once a strategy has been found. Most traders look for a miracle algorithm and then hope to make a fortune without having to do anything. Whether you do manual or automatic trading, you need to spend time developing and monitoring your trading strategy. There is a reason that banks and hedge funds pay mathematicians a fortune to keep their trading algorithms performing well. It's the same for a trader. It must adapt to market conditions.
- Experience: Only by practising can you gain experience. This applies to all areas. With automatic trading, it is the algorithm that does everything for you. Unlike humans, they do not learn from their mistakes. Errors are corrected only if the developer changes the code. In addition, if you do automatic trading, you will spend your time on sites that promote this type of trading. You stay in a bubble that only has coders. You don’t go to sites with traders who trade manually and whose experience is valuable to help you improve your trading quickly and become more efficient.
Good habits to adopt with automatic trading
Whether you do automatic or manual trading, developing your own trading strategy is the best way to optimize your performance. Develop a strategy that adapts to your investor profile and especially one that you understand. If you develop your strategy (which is essential), you fully understand the logic of the algorithm, the position entries and exits.
If you have the technical skills, you can code your strategy yourself. If this is not the case, have it developed by an expert. There are a lot of sites including ProRealCode which offers to develop your algorithm for free if you share it with the community.
In any case, never buy a trading algorithm on the net. That will surely be a scam. If someone sells you an algorithm, it's because it doesn't work otherwise they wouldn't need to sell it. It’s as simple as that. Trading robot vendors always show you positive backtests but you should know that this is a customer trap. With any strategy, I can show you a positive backtest. All you have to do is choose the right period for the backtest. Any strategy (or almost any strategy) is a winner at some point. Develop or have developed your own trading strategy. You can also test the free strategies on the net.
My opinion on automatic trading
Automatic trading has many advantages, there is no doubt about it. It largely eliminates emotions and maximizes the performance of your strategy through 24-hour trading. This can be very profitable and high frequency trading is the most perfect example of this.
However, at the level of an individual who does not have the technical resources of hedge funds and banks, automatic trading can be a trap. It is essential to change your strategy regularly and you must not fall into the money trap, which you think is easy. Work is just as important as manual trading to develop your trading strategy.
I have been a manual trading enthusiast for many years. I have tried automatic trading several times and I have never been able to code all the elements of my trading strategy. In many cases, the management of stop losses and position exits does not follow a rule precise enough to be coded. Coding my strategy would therefore mean making it much less effective.
And what do you think of automatic trading?
