THE PROS AND CONS OF AUTOMATED TRADING
Hi María here. Many people has asked me about automated trading, what it is, how to use it, the pros and cons, etc. Today I will try to answer all your questions.
What is automated trading? It allow traders to establish specific rules for both trade entries and exits that, once programmed, can be automatically executed via a computer. The trade entry and exit rules can be based on simple conditions such as a moving average crossover, or can be complicated strategies that require a comprehensive understanding of the programming language specific to the user's trading platform, or the expertise of a qualified programmer. (investopedia)
For example: The user could establish, for example, that a long trade will be entered once the 50-day moving average crosses above the 200-day moving average on a five-minute chart of a particular trading instrument. Users can also input the type of order (market or limit, for instance) and when the trade will be triggered (for example, at the close of the bar or open of the next bar), or use the platform's default inputs.
Once the rules have been established, the computer can monitor the markets to find buy or sell opportunities based on the trading strategy specifications.
Pros of Automated Trading: There is a long list of advantages of automated trading here are some of them:
1. No emotions: Once your emotions are out of the picture you are more likely to stick to the plan. Automated trading will help both traders: a) the one who is afraid to pull the trigger and; b) those who overtrade.
2. You can backtest: Traders can take these precise sets of rules and test them on historical data before risking money in live trading. Careful backtesting allows traders to evaluate and fine-tune a trading idea, and to determine the system's expectancy – the average amount that a trader can expect to win (or lose) per unit of risk. You can backtest your Forex Robot in a Demo account.
3. Discipline: Once you set the rules to follow the computer will follow them, even in volatile markets. The trading plan will be followed exactly. Also you make less mistakes.
4. Consistency: One of the biggest challenges in trading is to plan the trade and trade the plan. Even if a trading plan has the potential to be profitable, traders who ignore the rules are altering any expectancy the system would have had. There is no such thing as a trading plan that wins 100% of the time – losses are a part of the game. But losses can be psychologically traumatizing, so a trader who has two or three losing trades in a row might decide to skip the next trade. If this next trade would have been a winner, the trader has already destroyed any expectancy the system had. Automated trading systems allow traders to achieve consistency by trading the plan.
5. Better Order Entry: The computer is able to execute trades immediately, once the criteria is met. So you will enter and exit the trade at the correct time. Even a few seconds can make a big difference. Just see it when you trade Binary Options.
6. Multiple accounts and strategies: Automated trading allows traders to trade on multiple accounts at the same time and to use diferent strategy in each account, increasing your probability of winning. The computer is able to make diferent trades, monitor diferent accounts, something that humans are incapable of doing it.
Disadavantages of Automated Trading
1. Mechanical Failures: For example the Internet is down the order might not be send to the market. That´s why you should always run a test and adjust the system.
2. Monitoring: You still need to monitor the system during the day to verify is working properly. For example no missing orders, or duplicate orders, etc.
3. Over-optimization: Some traders create an automated system that is great in paper but perfom bad in real accounts. Traders sometimes incorrectly assume that a trading plan should have close to 100% profitable trades or should never experience a drawdown to be a viable plan. As such, parameters can be adjusted to create a "near perfect" plan – that completely fails as soon as it is applied to a live market.
Automated trading is great but you still need to monitor the system and know what exactly the system is doing, so you can avoid any mistakes. Is not a substitution for carefully executed trading, but it can really help you trade more accounts.
I received information about Math FX Pro a robot that will help you trade automatically. You can read more about it, see live results, and more HERE.
As always if you have any question or comment please let me know. And remember you can Double your First Deposit when you open your Instaforex account.
OPEN YOUR INSTAFOREX ACCOUNT!