Automated trading systems, also known as algorithmic trading, are computer-based programs that automatically carry out trades on the trader’s behalf. Their use has been gaining popularity lately due to the improved order execution speed and accuracy and their capacity to trade continuously. Despite their benefits, automated trading systems have some potential risks and disadvantages. This article will look at their advantages and some of the downsides you can expect when you use them.
Benefits of Automated Trading Systems
Consistency: The ability of automated trading systems to reliably and promptly execute trades is one of its key benefits. This is because they are designed to search for particular signals and place trades only when certain conditions are met. By doing so, the trader is freed from continuously watching the market, which may be both time and emotionally tasking. This can be particularly helpful for traders who cannot focus entirely on the markets owing to other commitments.
Risk Management: Risk management with automated trading systems can be very effective. Traders can maintain a considerably higher consistency if they configure the system to buy and sell following preset criteria than if they try to make decisions independently. This might minimize the possibility of making costly mistakes due to emotional or irrational decisions.
Timing: When it comes to time, automated trading systems are considerably more effective than manual trading. The reason is that they are programs that buy and sell digital assets much faster than individuals can.
Speed: In trading, especially when it comes to using an auto trader bot, as in the majority of other financial transactions, speed is vital. As a result, automated trading can help you maximize your profits by trading at the appropriate time and increasing your efficiency.
Downsides of Automated Trading Systems
Although automated trading systems have numerous benefits, they may also have certain disadvantages.
Delegating: When you use an auto trading system, you are delegating the control of your trades to the system. The system places trades based on pre-set configurations that you the trader provided it with. This means that you are not able to make real-time decisions, and must rely on the system to make trades on your behalf at least when the program is active and running. The good thing is that these types of systems and services can always be turned on and off. It’s common (actually the right thing to do) for a trader to stop or at least temporarily pause their trading system if they found a weak point, correct it and resume.
Cost: Many auto trading systems come with a cost, either in the form of a subscription fee or a percentage of your trades. This number can pile up rather quickly, especially if you are an active trader.
Learning Curve: Some auto trading systems can be technical, requiring a decent level of technical expertise to set up and maintain. This can be a barrier for traders who are not comfortable with technology.
Too Much to Tailor: Most auto trading systems come pre-built and ready to go. However, there are also bots that come close to being a blank slate where it requires many of your inputs to operate correctly. From inputting the indicators you’d like your bot to trade off of, to setting stop losses, trailing stops etc. For most, just seeing all the data-required fields on this type of bot can be overwhelming. The good news is that traders have options now. Whether they are a bit more advanced and like tailoring bots, or perhaps they are brand new and have never placed a trade before and would prefer to shadow or “copy trade” from a professional.
Dependence on the System: If you rely heavily on an auto trading system, you may become overly dependent on it. This can be problematic if the system experiences technical issues or if you need to make urgent trades. The positive is that there’s always the trusted backup manual way to place trades which helps the former view as well, so it’s a win-win.
Bottom Line
In conclusion, traders who want to execute trades swiftly and precisely may find automated trading systems helpful. However, these systems have a unique set of possible risks and disadvantages that you must take into account. Traders must understand these risks and take the appropriate precautions to reduce them.
