March 20, 2011

Should You Use An Automated Trading System?

If you’ve been making investments, you have most likely already read a little about implementing an automated trading system. Before you do this though, you need to first define this phrase and determine if it can do you any good.

Before anything else, take note that traders define automation differently when they apply the term to trade plans. Investors who have been in the markets for a very long time would most likely be in search of services or tools that can automate only a portion of their trading approach or plan. The best example for this is an auto feature for stop losses. The automatic feature here is the instant trigger of stop loss orders under specific conditions.

From the viewpoint of an expert investor, selected auto features in a service or tool are essential. In the example given, traders no longer need to call their brokers with an auto stop loss option enabled. In a sense this still fits the expert definition of what an automatic trading system is.

On the other hand are traders who treat automation in a different way. What they may really want out of an auto tool is a way to completely automate the trading process from start to finish. They expect to only have to install a program or piece of software that will generate recommendations for them to execute when they trade. These tools don’t require a lot of effort and time from their users.

This second concept of automation should be dissected further. The first step is to determine if there is such a thing. In reality, there are a number of different software products that come very close to complete automation. These highly attractive options are what are more popularly known as black box systems.

To be more exact, systems that are under the black box category give users trade suggestions based on pre defined elements given to them. These aren’t the best products to go for since there is no existing automated trading system that can do better than real people when it comes to analyzing trades. When you get a suggestion from a program, there is no clear explanation on how these recommendations were reached and you are left with no idea with regards to reliability.

Also, black box plans aren’t custom-built for individual traders. Always remember that people have different levels of risk tolerance, investment style preferences and theoretical backgrounds. Hence, each system should be made to fit the individual user. This is the best way to prevent frustration and losses that don’t fit a person’s ability to cope.

An ideal trading plan is then still that which is created completely for an individual trader in mind. Understandably though, this might be a difficult phase for people to jump into. If it’s too difficult for you to create your own plan, you can revise an existing system from someone else so that it fits you perfectly.

Obviously, a totally automatic trading system does not have your best interests at heart. You will never come across a program that can make perfect selections for you. If you’re really interested in automation, pick a program or tool that can partially address some aspect of your plan.

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