Automated stock trading refers to the use of software algorithms to execute trades in the stock market. The domain of automated trading has been out of reach to most traders, due to the complexities involved to get started. However, with the advent of technology and slick user-interface, modern day stock trading bots are able to distil the complexities into easy to use automated trading systems.
This article will explore the advantages as well as the disadvantages of running an automated trading system.
Advantages:
I. Speed and Efficiency
Automated trading systems can execute trades much faster than human traders. This can lead to better prices and improved profits.
II. Objective Trading
Automated trading bots execute trades based on pre-defined rules. There is no need to wait for a “good feeling” in order to execute a trade. Often times, this kind of emotionless trading yield better results over the long term.
III. Improved Risk Management
Automated trading systems can be programmed to implement risk management strategies such as stop-loss orders, which can help traders manage their risk better.
IV. Strategy Validation
One of the most advantageous area for automated trading is the ability to run multiple backtests in order to test the efficacy of a strategy. An advanced backtesting system is able to scan tens of thousands of market data and deliver results in few seconds. This saves the strategy creator expensive and time consuming trial-and-error strategy deployments.
Disadvantages:
I. Needs Huge Data Set
Automated trading systems rely on huge inflow of data and the ability to abstract and makes sense of these data to create meta layer for the trader. For many self-taught automated traders, access to huge data sets and creating working models from these data can be daunting.
II. Machines May Breakdown
Automated trading systems rely heavily on technology, which can be prone to failures and errors. To mitigate this, a good automated stock trading system should have a uptime monitoring system.
III. High Running Cost
Automated trading systems can be expensive to set up and maintain, requiring specialized software, hardware, and data feeds. Often times, strategy creator will need to subscribe to third party services such as historical and real time market data as well. The costs just add up.
In conclusion, automated stock trading has numerous advantages and based on the points above, one is better off finding a good stock trading bot to start his or her journey into automated stock trading.