WHY IS IT WORTH AUTOMATING YOUR TRADING STRATEGY?
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Before jumping right to the burning question, let’s cover a few basics first.
Given that you are here, chances are the words trading automation is a familiar phrase to you, but just in case this it is not, let’s look at what it means first.
WHAT IS TRADING AUTOMATION?
- Trading automation
- Trading algorithms
- Quantitative trading
- Strategy automation
All of these phrases in most cases refer to the same phenomenon – software that is executing trading decisions based on a certain set of rules.
To simplify, it is your trading plan converted to a computer understandable language, based on which the computer can decide when to take trades, when to get out of them, how to balance your portfolios, how to manage risk, etc. basically do everything that you would do.
A traders part in trading automation is only providing a rule-set that would tell the program when certain trading actions should be taken. After that, the trader can just watch the software perform his/her actions.
WHAT ARE THE BENEFITS OF TRADING AUTOMATION?
More free time
Lets just get this one out of the way, because this is the absolute obvious one, and probably the least important one in the grand scheme of things.
Automating your trading will free up all the time you would normally spend trading… because the software will do it for you… obviously. Imagine this as an employee that you pay once and it works for you forever. Not only that it follows exactly what you tell it, exactly the way you tell it to. Good deal, huh?
Elimination of the Human Factor
Now we are getting to the more interesting and more beneficial aspects of trading automation. Fully automating your trading will enable you to completely eliminate the Human Factor from your trading.
You may think to yourself, well whats so good about that? Lets explore this.
In a world of amateur traders, trading is perceived as something that benefits the ego more than something that benefits you financially. It is viewed that a trader himself calls the shots because he has a secret formula or an amazing sense of the market or simply is a genius, and as a consequence he makes money doing that. This is incredibly rarely the case.
In actuality, trading is a numbers game where a trader has a strategy that alongside his/her risk management logic statistically has an edge over the random coin-flip trading logic. Having this strategy a trader must be incredibly consistent in following it, since it is based on a statistical advantage and ignoring the rules for the slightest will end up skewing the statistical advantage to something that it isn’t (might skew it to the better in some cases).
That being said, lets look at the human nature for a bit. Humans are flawed beings when it comes to managing emotion. And money in our lives often is one of the strongest emotional stimuli. More to that, markets themselves often have a very azartic nature. Both of these things and a bunch more cause trading to require incredible discipline to be able to trade like a robot, ignoring all the emotions caused by the fluctuations in your trading capital, suffocating the gambler instinct sitting dormant within. Sadly enough we rarely have such discipline. And even when we do we are bound to slip up by our nature eventually.
More to that we as humans are limited to the amount of information we can process at a time. This also limits our ability to follow our strategy on large portfolios and work efficiently. Traders may miss curcial entry signals just because of not being able to absorb all that is going on at once. This then introduces outliers to the statistical numbers game that we are playing and causes it to be less scientific and more luck based.
A computer in this realm is the absolute perfect being to make use of then. It is almost not limited in the amount of information it can process at once, it is incredibly fast in making decisions, and it follows rules precisely without any emotion.
That being said, automating your trading will make it a purely statistical money making machine which it should be.
By no means, I am saying that discretional or any other form of trading does not work or is inferior to automated trading. It just takes incredible discipline, very long learning times, capital losses, and a huge drive to eventually develop the feel for the market where you can trade and gain a statistical advantage as a money manager and not as a set-in-stone strategy follower.