Automated Trading: Pros and Cons
Automated trading programs can execute repetitive tasks at speeds with orders of magnitude greater than any human equivalent. These apps are designed to trade stocks on a predefined set of rules.
Advantages of automated trading programs
There is a long list of advantages to having a properly trained computer program monitor and trade the market for you. Here are the most important ones:
Automated trading programs have no emotions. By giving the trading jobs to a properly trained computer program, the investor is removing the emotion factor from the investing equation. It helps him stick to a grounded, more realistic world based on facts, not fiction.
Strategy testing involves experimenting with a specific strategy in simulation mode. Careful testing allows stock investors to fine-tune their trading strategy and to program a positive outcome over time.
Because trade rules are absolute and trade execution is performed automatically, discipline is preserved even in volatile markets. Automated trading will keep the stock investor in market, a key component to building wealth over time.
Automated trading strategies allow stock investors to invest consistently. Trading continuously is more likely to build wealth due to the compounding effect associated with reinvesting profits.
Improved reaction time
Since computers respond immediately to changing market conditions, automated programs generate orders as soon as trade criteria are met. Getting in or out of a trade a few seconds earlier can make a big difference in the trade's outcome.
Automated trading programs can monitor and trade multiple stocks at any given time. They help spread risk.
Disadvantages of automated trading programs
Automated trading programs boast many advantages, but there are some disadvantages investors should be aware of:
It is possible for computer program to experience anomalies commonly know as bugs. If software development industry best practices are followed, these bugs can be identified and resolved quickly. Bugs can cause financial losses.
Although most Internet providers have accomplished 99.9% up-time, it is still possible that a natural or man made event cause an Internet outage. These events are not frequent but possible and can trigger losses.
Over-optimization can be damaging to a trading strategy. Using out of bound values will create lame trading results. When building a strategy, keep it simple. Over-optimization will prevent the rules from working in your favor.
All and all, we can reasonably say that because cataclysmic events happen rarely and computer scientists are properly trained to avoid publishing 'buggy' code to a production environment, the odds are in favor of using technology to help investors accomplish their goals.