Reader: Automated Trading – Can It Be That Easy?

December 5th, 2008

I received this question via email from a reader asking about automated trading.

Hi, I have a friend that just recently got introduced into systems trading (automated trading) through another friend that has shown consistent returns for the past 1-2 years. I’m sure systems trading works as its basically a robot that is replacing a person trading and by following a script that detects indicators on when to buy and sell.

From what he told me he has been making 20-50% per month in today’s volatile market. but in normal market conditions it makes about 10% a month. He’s using Tradestation and the guy made a automated script to trade the market. I would imagine there would be tons of these kinds of scripts that people has made just to do this kind of thing.

I asked a lot of questions as this was quite new to me. I understand what the system is doing, but from the way I see it, is it really that easy to make money through systems trading? And what if one of those days that the market goes in a way the system fails and you lose it all. just like how the martingale system works.

They tested their system on historic market data to make sure their system is valid and told me for them to lose it all it would have to do some kind of drastic move. what is your opinion on this?

Let me start off by saying that any good trading takes practice, skill, and hard work. That includes automated trading (or systems trading as the reader calls it). So, regardless of what type of trading you do, it will probably be more work than you think to do it well.

That said, I really like automated trading because it allows you to avoid a lot of the mistakes that manual traders make. Ninety percent (or some ridiculously high number) of traders fail – many of them because they make common mistakes that humans make. You’ve probably heard me say before that humans are hard wired to do the opposite of what it takes to trade profitably. For example, letting losers run instead of your winners.

Automated trading lets many traders do what is just not possible to do on their own – create and follow a trading system. There are a lot of traders out there who simply can’t follow their trading system because of their psychology and emotions.

Instead of relying on your emotions and gut, you can use automated trading to take a methodical and statistical approach to the markets – you can quantify your trading edge by backtesting and “pilot trading” (trading very small amounts to see how your system works in actual market conditions without putting too much at risk).

So, you can trade profitably without worrying about your account going to zero. If I was a better salesman, I’d say it’s a breeze and easy money. But I’d rather have clients that have realistic expectations about the markets.

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