Introduction
Automated trading may seem simple, but it has potential pitfalls and challenges, especially for newcomers. While it’s possible to make money, it’s important to understand the benefits and risks.
The Pros of Automated Trading
Probably the biggest advantage of an automated system is that it takes the emotion out of trading. A trader may get carried away in the excitement of a deal and go too far, or conversely panic and offload stocks too quickly. Automated trading literally takes a more logical approach.
Another major advantage of automated trading is the use of a concept called “backtesting”, where historical data is used to predict what will happen in the future. Because of the extensive resources needed to track vast amounts of stock market data, backtesting used to be the preserve of a few large institutions, but in recent times, it’s become more widespread.
We human beings need to eat, rest, and sleep, and there’s a limit to how much information we can process and store. Automated trading systems, on the other hand, have no such limitations. They work 24 hours a day, seven days a week. They can cover a boundless number of markets, and are able to respond immediately to any new developments, regardless of the time or day of the week.
Convenient, efficient, speedy, accessible, non-stop, cost-effective, and with comprehensive market coverage, there’s much to commend automated trading systems.
The Cons of Automated Trading Systems
Automated trading requires effective strategies to avoid losing money or missing out on potential profits. Power cuts or internet connection issues can also cause the system to fail, and design errors can lead to compromised performance. While automation removes emotion, it also eliminates the potential for inspired decisions based on gut instinct.
The Cons of Automated Trading Systems
Automated trading systems are often associated with scams.
Some scammers charge for access to trading tips that are not great.
Others create phony investment companies that take your money and disappear overnight, or empty your account after one or two trades and blame it on the markets.
Still others make it difficult or impossible to withdraw your funds.
However, it is easy to spot most scammers with a little common sense.
Make sure any company you work with is fully regulated and licensed.
Don’t be taken in by guarantees of risk-free profits.
Always read the fine print and look for proof of the company’s trading record.
Read online reviews and verify that the company has a physical presence and staff listed on social media sites like LinkedIn.
Be careful about what personal information you share.
Once you decide that automated trading is right for you, it is essential to understand what you are getting into.
Do your research: it can be a profitable way to make money, but it is not for everyone, especially if you have limited knowledge of how stock markets and forex operate.
Automated trading systems typically work by connecting a software platform to a direct access broker.
- This means that the choice of broker is especially important.
Before signing up with anyone, ask the following questions:
Can you provide evidence of your track record? - How much do you charge, and how – flat rate, commission, sliding scale?
- What markets do you cover?
- Can I personalize my own settings for risks and returns?
- Is the system set up for short term or long term gains?
- How easy is it for me to withdraw funds?
- Don’t be afraid to ask questions, especially if you are new to the game. A genuine broker will be happy to help you.
And remember, if you are unlucky enough to fall victim to a forex fraud or trading scam, there are expert companies out there who may be able to help you get your money back.
Conclusion
There’s no doubt that automated trading should have a place in the portfolio of every serious investor. However, it’s crucial that you understand the markets in general before you jump in, and also that you continuously monitor and maintain your system.