Automated Trading’s Biggest Advantage

June 2nd, 2008

This is the second in a series of posts about how and why I started down the path of automated trading. Here’s the first and second posts in the series (RSS). Our automated trading robot is available in beta now.

Over the past couple years, I’ve been continuing to refine my manual trading system and automating as much of my manual trading routine as I can. As I have devised and implemented more rules, it suddenly dawned on me that I was really trying to trade like a computer. That is, by creating rules so that I realized that I was removing more and more of my discretion from my trading – I was trying to trade like a robot!

Aside from the obvious benefits of just having a well defined trading plan, there’s a hugely valuable reason for doing this. Imagine a very loosely defined trading plan (that is, a plan with a good deal of human discretion in it and “going with your gut”). After you trade for a while and you start reviewing your results.

This is where it gets really tricky because that “discretion” is such a huge variable that is extremely difficult to quantify. Not only that, but it often changes through different times and markets. So even tiniest bit of discretion in your trading system will be the biggest and most uncontrollable variable in your system.

So when you analyze your results (which is by far the best way to improve your system and make more money) that discretion is a moving target. You’ll need a larger sample of trading data to start making conclusions and improving your system and even then those conclusions will be less reliable.

You can see where this post is going. Trading an automated system completely removes the biggest and most unreliable variable from the equation! It allows you to trade like a scientist – using hard evidence to draw concrete conclusions.

Discretionary trading certainly has its place (it’s still my primary trading style), but there are huge benefits to automating your manual trades and taking that to the next step – completely automated trading.

3 Comments

  1. Deltason Said,

    June 12, 2008 @ 3:22 pm

    Thanks! I’m just starting down the road toward automating a trading strategy and your posts are so helpful.

  2. Dave Said,

    June 16, 2008 @ 4:42 am

    @Deltason – thanks for your comment. I’ll be posting some more articles on automated trading soon.

  3. Generating Ideas for Automated Trading Strategies - StockTickr Blog Said,

    June 26, 2008 @ 12:23 pm

    […] Automated Trading’s Biggest Advantage […]

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