A few weeks back, I kicked off the Intelligent Investor Series as part of my weekly commentaries. Th...
Trade Like a Pro…Even if You Aren't One
06/18/2015 6:00 am EST
Numerous articles from a wide array of financial news outlets have focused on the potential pitfalls of automated trading, so James Breen, of Advanced Trading Technologies, highlights some of its benefits and outlines what it can and cannot do.
Can Fully Automated Trading Software Improve Your Performance?
Today over 80% of the trading volume in the financial markets is handled by computers. Large institutional firms have spent millions of dollars developing trading software. There are several advantages in employing this technology.
Computers are able to handle the volume in lightning speed—and more importantly—this technology eliminates the major human stumbling blocks of fear and greed.
As any successful trader knows, using a rule-based strategy consistently is essential. Few people have the discipline that fully automated trading software provides. Only in the last few years has this technology become available for the small user.
How does automated trading software work?
Most all are designed to follow the price direction in whatever market it is used in. Depending on how the strategy is designed, automated trading software can sometimes capture the bulk of the profit in a price move and reverse positions when it's appropriate to do so. Some automated trading software programs are designed for swing trading, others for day trading.
The software typically resides on the user's computer and interfaces with the brokerage firm. As an ongoing stream of price data is received, the software then determines whether to enter or exit a trade based on the price movements.
Fully automated trading systems offer the user the option to leave the trading decisions to the technology to determine, freeing them to go to work or do other things with their life rather than being glued to their computer screen. In addition, a well designed program has proven its merit over a period of years by a large margin, historically outperforming the institutional buy and hold strategy large investment firms tend to use. This is comforting to know, especially during major market corrections which tend to re-occur in cycles. Most importantly, a well designed fully automated trading system allows the user to trade like a professional, even if they have little or no trading experience.
What the technology is and isn't.
Fully automated trading software typically tends to be designed to follow price movements. They are mechanical strategies using math. They don't think—like humans do—and most are not influenced by news events or fundamentals. They tend to perform best when there is higher volatility in the markets.
However, it is still important to remember that, like any other strategy, there is an upside and a downside to this type of trading.
By James Breen, President, Advanced Trading Technologies
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