The pros and cons of automated trading systems- Are they a good choice for you?

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When you are trading with an automated system, there are many added benefits, but this doesn’t mean that there are no risks involved. You’ve come to the right place to learn both the advantages and disadvantages of automated trading systems. 

Automated trading systems are often advertised as a way to trade commodities and build wealth without lifting a finger. Yet, like it or not, this isn’t quite the case. Otherwise, we would all put robots to work on trading for us, and we would all spend the rest of our lives relaxing on the beach. 

At the same time, some people believe that automated trading systems are only draining your account without bringing you any real profit, which isn’t the case as well. Like always, the truth highly depends from trader to trader. 

So, first things first, let’s debunk that misconception: automated trading systems aren’t designed to make you a millionaire overnight. It is a growing trend in the investing world, and nearly 75% of shares traded on US stock exchanges are performed with automatic trading systems. However, they don’t make people millionaires overnight but rather give support during trades. 

Like with any other form or strategy of trading, automated trading systems have benefits and disadvantages. The best way to look to an automated system is as a mean to supplement your income, not as an option to make a lot of money quickly or without any work. 

Read on to find out precisely what automated trading systems are and what are the pros and cons of them. 

ATS explained 

Automated trading systems are programs that allow traders to set specific rules for entering or closing trades. Forex traders can turn their strategies, in terms of entry, exit, and money management, into automated trading systems that enable computers to perform trades and monitor them. Once the system is created based on the trading rules, the computer will automatically carry on trades on its own according to the rules the trader has set previously. 

So, in other words, you can customize an automated trading system based on your trading strategy and let it perform trades “on your behalf” without you having to do anything manually. 

Now, ATSs typically require the use of software that is linked to a direct access broker. So, any specific rule you want to introduce in your ATS must be written in that platform’s proprietary language. 

But how do you establish the trading rules? Basically, you can choose to program your own custom indicators and strategies for your automated trading system. However, if you are new to the trading system and need some help with establishing the rules, you can also choose a trading platform that allows you to choose from a list of commonly available technical indicators. Using these indicators, you can build your own set of rules that then be used to perform the trades. 

Are ATSs right for me?

Whether or not automated trading systems suit your trading style is obviously a matter of choice. However, we’ve gathered some of the pros and cons of them to help you make this decision easier. 

Pros of automated trading systems 

  • Minimizing emotions- making essential trading decisions when stressed, angry, anxious, or too excited is never a great idea because it can affect your risk-management thinking. Yet, when you automate your trades, you will not be able to hesitate or question the trade or change your strategy. Therefore, the system will stick to the plan and not allow your emotions to interfere with your trades.
  • Backtesting- Backtesting will apply trading rules to historical market data to check the viability of your idea. The computer cannot make guesses on its own, but you can tell it what to do. So, you can take precise sets of rules and test them on the historical data identified by the system. This way, using trading tests of different expert advisors, you can evaluate and fine-tune a trading idea to determine what the expectancy of the system will be. 
  • Discipline- As all trading rules are set previously within the system, and the system performs trades automatically, it allows you to preserve discipline even when you trade in a volatile market. Your discipline as a trader can often be affected by emotional factors such as fear of taking a loss or a desire to gain even more profit. Yet, with automated trading systems, discipline is preserved during all trades.
  • Improved order entry speed- automation makes everything happen fast. In trading, since computers have the ability to respond immediately to changing market conditions, automated trading systems will generate orders as soon as the trade criteria are met. And, you know that getting in or out of a trade even one second later or earlier can make the difference in the overall trade’s outcome. So, with ATSs, you don’t have to worry about keeping an eye on the market 24/7. 
  • Diversifies trading- ATSs allow you to trade multiple accounts or even use various strategies at once, helping you spread risk over multiple instruments. Plus, this also creates a hedge against losing positions. In other words, what would be nearly impossible for you to execute manually at the same time, can be performed by a computer in milliseconds. 

Cons of automated trading systems 

  • Possibility of mechanical failure- In theory, using an automated trading system only requires you to set up the software, program the trading rules, and watch it trade on your behalf. Yet, in reality, ATSs aren’t as reliable as that. For example, a lost internet connection might lead to an order not being sent. 
  • Require monitoring- the idea of automated trading systems is that you program them and let the trade. However, in reality, that’s not the case. You can’t just leave the computer for an entire day to trade on your behalf. Remember that there might be some technical failures such as connectivity issues or power losses, and it would be best if you are there to fix the problem as soon as possible.