In investing and trading, you need to be fast, accurate, and unemotional to succeed. Many traders can excel in one or two of these traits but fail at all the rest. Fortunate for us, technology is making things much easier for traders. From voice recognition software to automated trading bots that enable faster execution of trade orders sent by an investor.
Even though automated trading systems are widely used among professional traders, many new investors find them intimidating because they’re different from what they’re used to in their day-to-day life as a retail investor.
But if you think about it, using an automated trading system makes a lot of sense when trying to beat the market. Here are some benefits from using an automated trading system:
You may be surprised to learn that only 10% of your success as a trader comes from your ability to pick stocks. The rest comes from your skill in trading, which is all about properly managing risk and knowing how to execute orders. Trading is a numbers game, which is why you hear Wall Street people talk about the millions they’ve made trading one stock. It’s not about the stock itself, but the numbers surrounding the stock. For example, let’s say that you buy a stock for $100 and the next day it goes to $110. You would have made $10 per share, which is 10%. If, however, you bought the same stock for $100 and the next day it went down to $90, you would have lost $10 per share, which is also 10%.
The difference in this scenario is that you wouldn’t have made or lost $100. You would have made or lost $1,000 because you would have bought 100 shares of the stock. Most retail traders buy 100 shares of every stock they buy, which is why trading is a numbers game. ## Risk Management
No matter what strategy you use, risk management is crucial to avoid ruin. Automated trading systems often come with risk management tools that are either built into the software itself or are offered by the broker. These risk management tools can help you determine how many shares to trade, how much money you should risk, and when to get out of a trade.
These factors are extremely important when trading because they help you avoid a situation where your emotions get the best of you and you end up losing all of your money. If a broker doesn’t offer these types of tools and you’re using a manual trading system, you should find another broker. The best trading systems have risk management tools built into the software and are designed to help you succeed in spite of your own irrationality and bad decisions. ## Built-In Fail Safes
Automated trading systems can have built-in fail safes to protect you against bad trades and unplanned events, such as computer malfunctions. For example, if you set it up to enter a trade, but for some reason the computer malfunctions and doesn’t enter the trade, the system would have another fail safe that would stop that trade from ever happening.
In this case, the system would stop the trade from being entered automatically because it would recognize that something is wrong with the computer. These fail safes can protect you from unplanned events, such as a computer malfunction, and prevent you from entering bad trades. ## The bad news for retail investors
Automated trading systems are frowned upon by many retail investors, and many financial advisors warn their clients that they’re dangerous and can result in poor investment performance and high trading costs. However, these systems work best when trading large amounts of money, especially if you’re using a broker that charges you per trade.
For example, if you use an online brokerage that charges $10 per trade, it doesn’t make sense to manually enter orders and have these orders filled by a human being sitting at a computer and reading the screens just like you would. It makes much more sense to use an automated trading system and pay $10 per trade to have the system trade for you.
It’s important to note, however, that when you use an automated trading system, you’re not trading directly from your online brokerage account. Instead, you’re creating a separate account with the same broker. This means that you’re dealing with a completely different trading system than the one you use to manually enter orders in your regular account. In addition, your regular account likely won’t have the same fees as your automated account. ## Bots can provide important market data.
Automated trading systems are often used to run algorithms on the market and can provide important data that you wouldn’t get as an investor manually entering orders. For example, let’s say that you want to buy a stock and you want to know what its average price is during the past three weeks.
Traditionally, you would have to manually enter the order, wait a few days for the order to be filled, and then manually go to your broker’s website to get the data. In this scenario, the data you receive is already two weeks old. With an automated trading system, you can have the software run the numbers and bring you current data.
This type of data can help you make better trading decisions, and it’s something that you couldn’t get manually entering orders in your online brokerage account. ## A few key benefits of using an automated trading system.
Automated trading systems have gotten a bad rap from the media, but they can help you make better trading decisions and help you overcome weaknesses you have as a trader. Automated trading systems are constantly evolving and are designed to adapt to new technologies and improve as time goes on. Although automated trading systems don’t work for everyone and require a certain level of expertise, they can provide benefits that manual trading doesn’t.
