Advantages & Disadvantages of Automated Trading Systems

Advantages & Disadvantages of Automated Trading Systems

In this write-up I’m going to provide you with a balanced analysis of both the advantages and disadvantages of automated trading. Let’s jump right in and begin with the advantages first.

Automated Trading Reduces Emotions

In my view, all manual traders battle their emotions. Should I go in? Should I exit? Should I increase my stop? Should I decrease my stop? Am I too late? Am I too early? Everything can be hunky-dory when you’re trading in simulated or paper cash mode, but when you put live cash money on the line, something happens; your emotions take over. Even if you have a well defined plan, you have written down everything that may transpire in your trade, and on paper you are ready for any scenario – win, lose, or draw – but as soon as you see time and sales data, green bars, and red bar coming in and out in a hurry, you get nervous; all us mere humans do, because real money is on the line; your adrenaline is pumping – your mind is in fight or flight mode.

Imagine this hypothetical; you’re in a long E-mini S&P 500 futures trade and you’re up 10 handles – that’s 500 dollars per contract, but in the very next bar, you get a huge red bar that takes off 8 handles from your unrealized profits. You get nervous, and immediately exit your position with a small 8 tick win. Profit is a good thing, but that celebration doesn’t last, as in the next 5 minutes of trading, you watch the market rip roar another 40 handles in the direction you were in just a few minutes ago, and you could’ve made all that money, but you didn’t, because you got scared of giving back profits and you exited. This exact hypothetical scenario that I just described has happened to me several times when I was trading manually. It is very difficult, even for seasoned traders, to be in total control of their emotions. I mean which one of us mere humans can completely ignore our emotions, and exclusively use our logic like Spock from Star Trek. We are humans; emotions are hard wired into our systems.

Using an automated trading system mitigates the emotional based decisions. The automated system does the execution of entries and exits for you. In the case of Price Action Harvester™ Automated, it is a self-directed fully automated system where you put in your profit targets, stops, trade direction, your other exit parameters, and upon you making those inputs, and you enabling the software, the system runs by itself. Once you enable the software, you can sit back and watch what it does. Now, it still doesn’t completely solve the problem of emotional trading, because you can still override the system and manually exit; at the end of the day, it’s your trading software, and you are in control of what you do with your software.

Automated Trading Saves Time

Back in the day when I use to trade manually, I would wake up at 5AM PST, and I would look for any trending stocks as I kept an eye on the E-mini Spooz and the VIX. I would glance at news; check out places like StockTwits to see what the hubbub was for that day. My manual strategy was a mix of an event driven approach, combined with technical analysis based on price action  and volume. Imagine doing that full time, every single trading day, while running a business with a staff of 7. It takes time. I would essentially try to set-up trades and would almost always try to exit my trade before I went to my actual job. I wanted to automate the process, ignore the noise of people pumping their individual stocks, and just focus on patterns and technicals. So I eventually coded an automated trading system script for myself, because I didn’t want to continue spending hours glued to a screen, hunched over hurting my neck, lacking sleep, way over caffeinated, looking to make a decision if I should go long or short, or just stay on the sidelines. With an automated trading system one can skip all of that grunt work, and save a ton of time.

Backtesting – a Huge Advantage in Automated Trading

Automated systems can provide you with ample opportunity to backtest your strategy and see if your idea would’ve worked over a long period of time, and over many trades. Now, I recommend backtesting for at least two years, and the system should make at least 500 trades during that period. That is essentially what I have done with Price Action Harvester™ Automated. Remember though, past results are not necessarily indicative of future results, but backtesting a system will give you a tremendous advantage vs. manual trading.

Disciplined Approach

Being disciplined in trading is half the battle. When I was manually trading, I made a commitment to myself that I would keep a spreadsheet of all of my trades; including entries, exits, stop prices, wins, losses, commissions paid, net profit, etc. I would do that for a few weeks and then slack off. Why? Because it takes time! What’s more, when a human loses, the human tends to get frustrated, and doesn’t want to be bothered with documenting the loss during the time they are trying to cope with their loss. It is easy to say I’m going to keep a detailed journal of my trading activity; it’s another matter to consistently do that. In other words, those pesky emotions get in the way of a trading process. Moreover, when a human trades manually, the news of the day may impact their decision making process. News trading, or event trading, can be finicky, and may deliver unpredictable outcomes. However, when you use an automated trading system, there is a set of logic already built into that system, and that system will automatically execute trades, and do so while discounting all the “noise.”

DISADVANTAGES OF AUTOMATED TRADING

Now, automated trading is not all positive. There are some negatives. Having stated that, some of those negatives can be mitigated, others cannot.

Mechanical Failures

Your computer or VPS may freeze or fail completely. Your router may fail, and may go into permanent reboot cycle. Your data provider’s servers may go down. Electricity may fail. Some of these disadvantages can be mitigated, others cannot; it all depends on how much resource and effort you want to put into your trading environment.

For example, if your computer freezes, you have no option but to reboot your computer. There are settings within NinjaTrader 8, which is the platform I built Price Action Harvester™ Automated on, that you will need to familiarize yourself with and set properly, so that NinjaTrader will know what to do in the case of a disconnect.

Internet Connection Loss

Imagine all of a sudden the bars on your 1-min chart stop moving. You may have lost your Internet connection. Losing an Internet connection can be a scary ordeal if it happens in the middle of your trading day. What that means to any automated trading system, is that the programmed exit(s) that depends on a live Internet connection will not fire off. You still have your stop price, and price targets which get submitted in Price Action Harvester™ Automated immediately to your broker upon the entry of a trade, and are essentially sitting on your broker’s servers, but you are missing out on other potential technical exits. What can you do? First, determine if the Internet connection failure is a temporary hiccup, or if the Internet connection loss is going to be a sustained issued. Either way, you should have your broker’s number handy, as you may need to call them and request their assistance in exiting a trade.

Monitoring Automated Trades

I personally believe that all automated trading systems need to be manually monitored at least several times throughout the day. I used to rely on TeamViewer in this regard and would just connect to my trading machine whenever I was out and about, just to keep an eye on everything. Meaning I wanted to ensure my computer is up; my Internet connection is up, etc. You should always watch the computer and your trades a few minutes before your predetermined exit time, where you told the system to flatten all your trades, and close all your open positions. You want to do so, because you may not want to be stuck with a trade and hold it overnight. It may not be the end of the world if you end up holding a trade overnight, but if you don’t have enough money in your account to meet your broker’s overnight margin requirements, they will simply sell your position themselves to cover your overnight margin.

Missing Breaking News Event Trades

Sometimes you get awesome breaking news, and every news station is covering that particular event. Those types of event driven situations can significantly move markets in either direction. Most automated trading systems, including mine, are news indifferent; as such you may miss out on taking advantage of breaking news events.

Well, there you have it – the advantages and disadvantages of trading via an automated trading system. If you would like a demonstration of how Price Action Harvester™ Automated works, and if you would like to see how its capabilities may benefit you, then please book your reservation for a live Zoom meeting here.

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Raffi Sosikian, principal at Pinnacle Quant LLC, being interviewed by Matthias Knab of Opalesque TV while at the SALT conference in Las Vegas. 

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Raffi Sosikian, MBAPrincipal of Pinnacle Quant, LLC, CTA