Greetings traders and welcome back.
Thank you for joining me again as always. Chris here, bringing you
another Survival Guide. Today's subject will be a topic that
revolves around the continuous march forward of technology.
Everyone's seen the movie Terminator.
Well today, we're going to be talking about automated trading
software. Trading with robots, to a degree.
Essentially, we're going to talk about what that is, as well as some of the pros and
cons so at the end of all of this you'll be able to form your
own opinion on whether or not it is right for you.
We see traders passing the Gauntlet Mini™ on a daily basis
with the help of EAs, which is another term for automated
trading software, and as such, I felt it was definitely something worth sharing.
Without further ado, let's get going.
Trading itself is one of the industries that has been disrupted
quite heavily by technological developments over the last 20 years.
We have progressed in staggering degrees.
Now we've seen things such as the introduction of electronic communication
networks, we've also seen smart order routing, as well as automated
trading software, which is what we're going to be focusing
on today. Thanks to these robotic style formulas,
it's even possible to trade while we're not even sitting
at the computer, and because we are so far along, a lot of
these processes are relatively affordable.
Does this mean we've solved all sorts of financial trading
aspects through the use of robots? Absolutely not, but there
are some pros, and there are some cons, and we're going to talk about this exactly.
What is automated trading software?
Well, it is programmed trading systems that allow automated
buying and selling of assets upon predefined rules.
Some people refer to them as Expert Advisors, otherwise known
as EAs, and you may hear me say this going forward,
so let's get that out of the way now. Expert Advisors
are popular for a variety of reasons. Many successful traders find them very valuable
because it helps them control some issues with discipline
or other various trading self-control problems.
It gives them the ability to strictly follow what their brain
has decided, as far as the reason for entering a position
without worrying about the emotional deviation factor that
can get involved when we are trading. Trading robots do
the opposite of anything with emotions,
they are pre-programmed to follow a specific set of rules and nothing more.
They can trade tirelessly 24 hours a day, 7 days a week, 365
days a year, in theory. An automated trading software itself
can function as an extension of the principles of some type
of algorithmic trading. The intent behind the automated trading
software is to maximize a trader's capacity and expand their
horizons to trade on different assets in different markets
simultaneously. The concept of EAs in their current form was
first proposed in 1949, and it was further developed in the
1980's by a man called John Henry. In the 1990's, tech-savvy
taders began experimenting with automated algorithmic trading
systems for a proprietary usage. Next to that,
we also had automated trading software breaking its way through
to brokerage companies and asset managers.
It essentially began at the highest level and essentially
worked its way back down to the retail trader level,
which is where all of us are at.
Automated trading software systems run advanced mathematical
models to make high-speed trading decisions and transactions.
EAs are designed to replicate the way that traditional trading methodologies work.
This means that they are looking to employ the concepts that
we come up with, but do it in a manner that takes out some
of that emotional baggage. The set of rules, or the strategy
is then programmed to trade automatically when the predefined
conditions are met. We can think of EAs as a tireless, more
powerful digital version of ourselves trading for us.
The automated trading software can be linked directly to
a broker account or coded right into a particular platform,
in whatever proprietary language it might be. All of the
different platforms have their own language for the most
part. Aside from the coding skills to build an automated trading
software, one should definitely be aware of all the disciplines
that successful traders need to be experts in when they
are building some type of automated software, which includes
technical analysis, mathematical modeling, statistics, as well as many other things.
This is why that building an EA is usually a costly and complicated
process, or at least it definitely used to be. The most prominent
players in the industry are usually highly seasoned programmers
with skills in C++, Java, Python, or other coding languages
before they even begin trying to code an automated trading
software program to trade for them. The majority
of brokers also invest though in automated trading systems
themselves to grant their clients access to high-end sophisticated
trading assistance in order to optimize their order flow
process, as well as entice further clientele to come trade at their firm.
As far as what it actually does, automated trading software
basically does the same as a regular trader, but in a more
efficient, robust, and fast way. The automated system takes
the emotions out of the equation and trades only on pre-defined
rules, or in other words, the software tries to take advantage
of instruments that are under or over valued for a particular
reason, be it fundamental, or one of market inefficiency and
mispricing. To determine which instruments are worth
trading, the system takes a wide variety of factors into account
depending on the strategy and the trader's risk tolerance.
The EAs can take into account everything from fundamental
factors, news, social media buzz, to technical analysis indicators,
liquidity, volatility, and numerous other factors. AI powered
EAs continue to make trading even more possible for those
that get their hands on it.
The idea here is though, you have to have correct inputs to put into the system
in order to get correct outputs out of the system.
That means if we want to have a profitable EA system working
for us, then we need to have a profitable system to begin
with. Although it may sound so far like EAs are the key to
solving the financial markets,
the truth is they do have plenty of drawbacks. The list ranges
from high cost to complexity, as well as unpredictable or
overrated efficiency that they may provide when they are under tested.
Which brings us right into our next topic, which is the risks
associated with robot trading.
We have our big angry killer robot over here on the right
to really emphasize the fact that robots are scary.
I'm mostly kidding here folks,
but the first one is going to be the fact that this is a
big deal: The scam factor. All of us have seen scam robot software,
even if we didn't even realize that's what we were looking
at. When we're looking for various platforms out there,
it seems like everybody has an EA, or some type of software that
you can download that will turn you into a millionaire overnight.
The robot trading market place is just proliferated with
these different scammy style softwares that in reality, don't
have any real trading basis behind them. Instead, just some
clever marketing that someone's using to make a dollar. Next
is the fact that there are false expectations with them. The
false expectations means that we always kind of look at these
robotic trading systems and expect them to solve all the
problems without putting any work into them.
Remember that the performance that the robot software itself
is going to achieve is going to be based on the criteria that we tell it to perform.
That means we have to have something that is worth putting
in, in order to get something that is worth coming out.
Next is the speed. The speed is definitely a risk factor potentially. Profit
opportunities in today's markets are short-lived.
That means that we should be at the front of the line when
we want to capitalize them in ready to take action and to do that,
we need a well-designed trading system and a quick connection,
which is something that a robot trading software could definitely
help us with, but possibly to a detriment in some situations.
Imagine if you had a position that you were anticipating staying
away from due to a particular news release that your EA didn't
account for, and before you could close, your EA, it took the
trade anyway, because it is just so darn fast at reacting.
As soon as the situation is met,
it does what it's told to do. In this case, speed can be a bad thing.
Then, we also have the idea of the automation's complexity,
and this just revolves around the idea that complicated algorithms
are being put into these EAs in order to make them work. In
order for it to create a visual representation on your screen
and give you the information that you need,
there's a lot more going on than just the simple rule of
buying when this is occurring, whatever this may be that you
decide. There's a lot going on there behind the scenes as well, and due to that,
you can consider it a much more complex version of trading,
and as such, a complex version of trading may potentially
provide a drawback as far as accuracy goes. Now, to work our
way into the pros and cons of using EAs while trading. The
first one is the fact that it just simply takes emotions
out of the picture, which can be a gigantic con depending on
which type of trader you are. If you know that you're susceptible
to the emotional swings, which most of us are, this is a huge
con in this regard. The benefit of a robot trader's the fact
that it doesn't make irrational decisions that are based on emotions.
This is huge. A large portion of my losses when I first getting
into the trading world were due to emotional swings.
The second pro is the fact that it does have that improved
speed. We mentioned this as a risk factor, but that doesn't
mean that it is necessarily a negative thing.
It means that it's something to be aware of, but with risk
comes reward. Automated trading is much quicker in terms of
order execution when compared to a manual trader. The
reason is that the computer can respond to a particular signal
way faster than our brain is able to tell our fingers what
to do, and as such, the improved speed can allow us to get in,
and get a better price potentially than had we delayed our
entry just a little bit, and the move already began. Number
three is that it allows the application of more complex trading
strategies. A good trading system allows you to include multiple
parameters and data sources when building a trading strategy.
you can construct a multi-dimensional trading strategy that
takes into account market sentiment, indicators, technical
signals, social media factors, fundamental, all of this
can be calculated by an EA on the fly, much faster than we
are able to do ourselves. Number four is somewhat along
this line, and that's the fact that it is just more powerful.
We discussed how a hard day trading, you know, opening and
closing several positions in a day, could cause those things
that we don't want, which we refer to as emotional triggers,
but the EA doesn't get tired. It doesn't care.
It is going to continue to do what it is told to do forever,
without ever arguing back, and as such, it is very powerful.
As far as the potential cons go,
the first one is the fact that there is technical risk.
Although computers are much more reliable than human traders,
we should note that they also bear some risks.
Most of them are related to the cases where the system runs
locally, and range from things like power shortages to technical
glitches and loss of an internet connection.
These are all potential cons to using an EA to trade.
It is worth mentioning that some of these cons do also apply
to us as traders because, regardless of whether you're an
EA or an individual trader, if we lose Internet, we lose Internet.
Number two is going to be, they are far from flawless
as far as the EAs go. Many people think that EAs can make
them the hottest trader on the block overnight, and the truth
is that, automated trading systems are good as the strategy
allows them to be. If we do not have a bulletproof strategy, then there's
no reason that we would expect our EA to also be bulletproof.
Number three is that we should still keep an eye on them.
We should keep an eye on them due to the fact that it is
possible that a glitch occurs, and it could cost us a lot of money.
There was a crash in 2010 where they referred to it as the
"Robo-Trader Flash Crash", where Knight Capital lost 440 million
dollars just due to this exact occurrence. A trading glitch
in their EA software caused a gigantic deficit. Number
four is they can prove to be expensive. The cost of EAs, if
you are buying one outright, or if you're paying to have
one coded, can get quite costly.
Usually, you are going to get what you pay for as long as
you are avoiding the scammy software options out there, and
there are plenty of scams out there folks.
But if you are paying to have it done, or you are paying for
something of quality, chances are it is going to cost a decent
amount of money to get that work done for you.
In conclusion, EAs have the potential to be exactly what
we make them to be, as well as how we choose to oversee them and operate them.
If we are out there searching for an EA that is going to
solve all of our trading problems for $100,
you'll probably find something for $100, but it may not do
any of those things for you. If anything, it might just dig a hole deeper.
If you see something that seems too good to be true, chances
are, it probably is. Other traders will ask,
well, can I just build my own? And yes, you can, as long as
you have the patience and the coding skills, or the willingness to
to learn everything you need to know in order to build it, which means you learn
how to code it, which means you learn a proper trading strategy
to have your EA employ for you, then
yes, you absolutely can build it, and I strongly recommend
going this route because it can be a very enjoyable hobby
that you can do on the side while you are pursuing your trading
career. Now, as you are using EAs it is always a very intelligent
decision to make sure that you're using a demo account while
you're experimenting and while you are testing it out. Give
yourself a month of results before you even consider using
that EA to run on your live account.
Until next time folks, I hope this information on EAs
has provided some insight into the world of robot trading,
and if you plan on using an EA while you take the Gauntlet
Mini™, then I wish you the best of luck.
Thank you for joining me as always folks, until next time, over and out.