Validea is an advisory service which assesses stocks based on the investing criteria of many of the ...
Top 5 Reasons to Not Automate Your Trading
01/09/2015 6:00 am EST
While automated trading may look appealing and could provide a trader with some nice profits, Kevin Davey, of KJ Trading Systems, shares five important reasons why automated trading may not be so good, since there is an upside and a downside to this type of trading.
Automated trading (or algo trading, mechanical trading, rule based training, bot trading or whatever you want to call it) can be very enticing and it may just make money for you. But, there is an upside and a downside to this type of trading.
Five Reasons Why Automated Trading is Not Good
1. Garbage In, Garbage Out
Many people think automated trading is a cure-all. "Well, my discretionary trading is awful, so automated trading must be how people make money. I'll try that I guess." That is a very common way of thinking. The problem, of course, it is wrong. Any type of trading can be good, just as any can be bad.
Don't assume that just because you automate a strategy that it will produce profits. Developing a solid strategy takes a lot of time and effort (heck, I even wrote a best selling book on it). Remember, the result you get in trading is usually a direct result of the effort you put in.
2. Automated Trading Does Not Lead to Discipline
I was talking to a newbie trader a few months ago and he told me he was trying automated trading because he needed discipline in taking the trades his strategy demanded. I told him automation would not solve that, He, of course, ignored my sage advice (maybe I need to work on my delivery?). A few weeks later he went live and told me he made $500 the first week. Great, I thought, maybe he has discipline. But then he dropped the bomb…he turned automation on and off during the week. If he had kept it on, he confided, he would have made $2,600.
The lesson: you need discipline to trade, regardless of how you trade. Automation does not instill discipline. You need to find discipline from outside and bring it to your trading. Not the other way around.
3. Unattended Trading Can Lead to Big Trouble
Many traders with full-time careers can't check on trades during the day, so they mistakenly turn to automation. I can tell you from experience that letting automation run without monitoring can be very expensive. One runaway rogue trade can cost months of profits. If you automate, you must check-in on your strategies often. I usually check my swing strategies a few times a day and my intraday systems even more frequently.
4. Automation Doesn't Mean You Can Play in HFT World
Many inexperienced traders think they can develop a scalping bot that will trade 50-100 times per day and that they can run it automated through their retail account. If there is someone doing this successfully, please let me know, because I have never heard of such a person. "Dream scalpers," as I call them, are playing against the big boys: high frequency trading (HFT) firms with tons of infrastructure, speed, and precision. To think a little scalping bot can compete with HFTs is pretty much insane.
The lesson here is if you are automating because you think you have a printing press money machine, think again. If you don't believe me, test it live. I bet you'll find out your scalping strategy is really just a dream. And automating a bad strategy just leads to the poorhouse quicker.
5. Automated Trading Still Is Emotional
A lot of people think that the emotions of trading can be eliminated by automating. Wrong. As long as you are playing with real money, there will be emotions, regardless of your method. Don't let anyone tell you differently. The emotions, and the triggers, might be different from automation, but there is still plenty of stress, anger, greed, and disappointment in automated trading.
By Kevin Davey of KJ Trading Systems
Related Articles on STRATEGIES
The Roman philosopher Seneca wasn’t talking about the stock market when he wrote that “T...
The Dow Theory was originally referred to as “Dow’s Theory,” since it was based on...
When stocks are selling at valuation extremes and consumer optimism is at one of the highest levels ...