5 More Reasons to Consider Automated Trading

December 22nd, 2008

This post was contributed by Kelly Kilpatrick, who writes on the subject of currency trading. She invites your feedback at kellykilpatrick24 at gmail dot com.

Each day, more and more traders are leaning toward automated trading. Far more precise and less prone to human error, automated trading truly does seem to be the way of the future. Browse through the following list and see some more reasons why you may want to consider automating your trading and free yourself up for something new.

You Set the Parameters

You may be hesitant about leaving your financial future in the hands of a computer, and that is completely understandable. However, you are the one that ultimately sets the parameters for just how far you are willing to go on any given day. Of course, the term automated trading sounds like you won’t have to do anything, but this is far from true – you ultimately set yourself up for success or failure with automated trading, just like manual trading.

Attend to Learning and Research New Investments

Once you establish your parameters for your automated trading, you are free now to pursue more investment options and continue learning about new strategies and possibilities. This is valuable, indeed, and helps lay the foundation for more earning potential in the future as you continue to develop your skills while the program does the dirty work.

Snap Analysis

Automated trading programs are able to analyze copious amounts of data in a very brief amount of time. This being said, the program can make the best analysis far faster than you can and will make a decision based on the guidelines you have put in place. This can be very beneficial in crunch time and could ultimately save you valuable time and money in the process.

Emotional Detachment

The program itself will not be emotionally attached to the investments or the data. This can be a great thing when you are having a tough time making a rational decision. The fact that the program can crunch more data and use said data to make an informed decision will only serve to help you and your needs down the road.

Results Speak for Themselves

If you look through some of the previous posts on this blog, you will begin to see that this kind of trading has been very good to us indeed. Manual trading can be tough; sometimes we zig when we should have zagged, but automated trading seems to take this phenomenon down to a minor point.

Different Automated Trading Systems – Which One Is Right For You?

December 18th, 2008

For new automated traders, it’s always interesting to hear what their mindset is. Specifically, it is interesting to know the type of system they plan on trading – not the specific details of their strategy, but from a very high level.

If you follow this blog you probably already realize that there are at least hundreds if not thousands of profitable systems out there. But how do you find one that YOU can use to make money. If you’ve taken the step into automated trading, you have lots of options.

Here’s one way I like to separate systems into categories for the purposes of automated trading – I think this provides a nice blueprint for how to start thinking about automated trading.

1. Automate a Manual System You Already Trade

The most logical step for a lot of traders is to automate a manual system that they’re already trading. I think this is a great place for most new automated traders to start. It allows you to take small steps into automated trading in an environment that they’re already familiar with – their manual trading system.

By doing the prep work to automate their manual system, the trader has an excellent frame of reference to compare their automated results to since they already have extensive experience manually trading the system. Once they’ve converted this system over to full automation, it provides a good foundation to start delving into other strategies.

The other advantage to this approach is that when you start modeling your strategy and backtesting it, you’ll likely learn a lot more about your manual trading by doing so and your results will be more consistent.

2. Trade a Strategy That Looks For Infrequent Setups

There are a lot of profitable manual systems out there that trade really infrequently. While it’s possible for you to stare at your computer screen all day waiting for the setups to materialize, it’s much more efficient for you to automate this type of system. So while it’s not impossible to manually trade these types of systems, automated trading can give you a clear edge since your automated trading software doesn’t need to take a rest or eat lunch. 😉

I’ve traded systems like this before and inevitably a very frustrating thing happens – you wait for hours looking for the setup and then you get distracted for just a brief period and (of course) that’s the exact time that the signal occurs and you miss it and you torture yourself with the decision to chase it or not.

Automating this type of trading system is usually a big time saver and saves you a lot of wasted effort.

3. Trade a Strategy That’s Impossible to Manually Trade

This class of strategies is probably the biggest reason to start automated trading. There’s a whole universe of strategies out there that are simply impossible to trade manually, but that you can unlock by using automated trading software. For example, let’s say you want to enter 50 orders in the first minute of the trading day all with specific entry and exit criteria. You don’t need me to explain why this is impossible for a human to trade. With software, trading this type of strategy is now possible.

Another reason to trade this type of strategy is that there are probably a much larger pool of traders trading the first two types of strategies. However, because this type of trading can’t be done manually, you’ve excluded the vast majority of traders from your “pool of trading competition”. That is, you’ll essentially be competing against fewer traders.

Google Tech Talk on History of Automated Trading

December 17th, 2008

Max Dama alerted me to a very good talk by David Leinweber who has been involved with automated trading and the markets for a long time. It’s about an hour long and the first 40 minutes or so are excellent.

In one of his slides he shows this image which I believe sums up the evolution of the trading industry as much as anything.


What I didn’t like about the talk was towards the end of his presentation. David culminates his talk with a discussion of an obviously well chosen example of how you could scour news stories to piece together a case for buying a stock before the market realized the implications of the news and therefore you’d be ahead of a huge surge in the stock.

I think most folks (especially analytical people) would be better off trading technicals than trying to guess how the market will react to a news story. That said, it’s well worth an hour of your time to watch his presentation.

David blogs about his new book, Nerds on Wall Street: Math, Machines and Wired Markets.

Automated Versus Algorithmic Trading – Which is it?

December 16th, 2008

This is a follow up to the informal survey I posted a few days ago about the best name for automated trading. I’ve heard it referred to a number of different ways and I was wondering what most people refer to it as.

My Thoughts

I have a real problem with referring to automated trading as “systems trading”. It seems like a lot of people call it that, but I think it implies that any trader that isn’t traded automatically can’t possibly be actually trading a system. That’s obviously not the case.

I couldn’t quite figure out why I didn’t like “program trading”, but I like Jason’s reply that it just seems like 80’s terminology for some reason.

That leaves algorithmic versus automated trading. I like the phrase automated trading because I think it implies that it can be applied to essentially any trading system. Algorithmic trading on the other hand seems to imply a specific style of trading – one that involves intense and complex computations. Oooh – scary and complicated! 😉

What Do People Search For?

Max Dama sort of stole my thunder with his post on the subject, but here’s what Google says about automated versus algorithmic trading in terms of what people search for. It turns out that automated trading is searched for about 30% more than algorithmic trading – which seems to be about right.

I looked in the Google Adwords tool to compare automated trading and algorithmic trading and it indicates that advertising competition for “automated trading” is significantly higher than it is for “algorithmic trading”. This means that a lot more advertising is targeted at automated rather than algorithmic trading.

So no matter what your personal opinion on the subject, it’s hard to argue with where most advertising dollars go. 😉

Survey: Is it “Automated”, “Algorithmic”, or “Systems” Trading?

December 8th, 2008

I’m interested to hear what you think about this controversy. When referring to a framework where a computer initiates and manages trades without human intervention – what phrase do you think best describes that concept?

  • Automated Trading
  • Algorithmic Trading
  • Systems Trading
  • Program Trading (added thanks to Drew’s comment below)

What phrase would you say most people use? I’ve got my own thoughts on the subject that I’ll write up in a future post, but first I’d like to get your thoughts?

Which one is best and why? And which phrase do you think is most popular?