The Benefits of Automated vs Human Forex Trading
Why is it that more than 70% of the institutional trading volume in forex is automated, whereas only a small fraction of the retail volume comes from automated trading systems? Is it due to the software being too expensive or difficult to operate? Or is it because private traders lack trust in automation systems and would rather stay in control through traditional point-and-click trading?
In this blog we briefly compare and contrast manual versus automated trading from a retail trader’s perspective and thereby provide a better understanding of these two approaches. Automation for retail traders is neither necessarily expensive nor difficult and there are many options as we have previously discussed in a previous blog post.
Automated Trading – two main concepts
As opposed to manual trading, automated trading involves relinquishing a certain degree of control either by letting a computer execute your trades on the back of a certain strategy OR by electing to follow a (human) third-party with (seemingly) superior trading credentials to those of your own.
The former is typically referred to as algo-trading or ATS (automated trading systems) while the latter is often referred to as ‘copy-trading’ or ‘trade-following’. Both systems involve a degree of automation and both have merits. However, in this article we will focus solely on automated trading systems and what benefits this style of trading has compared with traditional point-and-click trading.
Why Automate Your Forex Trading?
Transferring a forex trading strategy or concept from ones head to a computer is not necessarily easy but there are several avenues you can pursue as described in our blog. But why would someone want to automate his/her trading in the first place? Well, there are several advantages which are worth a mention and we have listed the main ones below:
- Isolate yourself from your emotions
As humans, we are emotional beings and often find ourselves driven, involuntarily, by emotions that override common sense or logic. Two fundamental emotions that all traders will experience at some point are fear and greed. When things do not turn out as expected we become worried and gripped with fear of suffering losses and this affects the way we trade. Similarly when things go well and according to our expectations, we become greedy and overconfident which inevitably leads us to take on more risk which, at some point or other, is most likely to result in failure on a large scale. By surrendering your trading to a computer you can avoid making emotionally-driven mistakes. A computer doesn’t think, get angry or sad, it just follows orders and only executes when the rules and criteria of the strategy it is following are met. This is likely to save you from lots of bad trading decisions over time.
- Reduce Data-overload
The extreme amounts of price-, indicator-, macro- and political data constantly being produced makes it near impossible for the independent trader to process the data adequately. As a result, most traders stick to trading only 2-3 pairs in order to gain experience and optimize their chances of successful trading. This is however not ideal as many attractive trading opportunities in other markets may well be missed. Letting a computer monitor the markets for you will alleviate this problem and help you identify trading opportunities and trends to design your strategy around.
- Decrease Your Reaction-time
The markets can often become volatile and difficult to trade at times of key data-releases or major political events, central bank meetings etc. Reaction-times in these situations can often mean the difference between a winning and a losing trade. While market liquidity is always an external factor that cannot be alleviated, using automated trading systems will give the trade the best possible chance of executing his/her trades quickly and efficiently which is likely to have a considerable positive effect on the long-term trading results.
- Trade at all hours
The forex market is the biggest asset class in the world with a daily traded volume exceeding USD 5000bn. The market activity literally moves around the globe alongside the sun and is open 24 hours a day on all weekdays. This makes is rather difficult for retail traders to monitor the market efficiently and many trade opportunities are missed while the trader is at work, asleep or away from his internet device. Automated trading solves this problem as the computer is always on and readily monitors the markets round the clock.
- Stick to the plan
The best way to make any decision in life is to do so when one is calm and focused. When it comes to forex trading, rash decisions made ‘spur of the moment’ are most often the wrong ones and this type of behavior should be avoided. The key to long-term trading success is to patiently analyze the markets, identifying strong trends that are likely to repeat themselves and designing a strategy around that. As mentioned above, the trouble is that our ego and emotions often get in the way of good trading discipline and makes us stray from the plan. Automated trading solves this problem very easily; the computer stays the course and only trades if/when the criteria of your strategy are met. No more – no less.
Every trader is different; the obvious variables being experience, time available to trade, psychology and risk appetite. As described above, automated trading brings lots of advantages and really it is only your own imagination that sets the boundaries for what the possibilities are. Yet ATS is not for everyone. Very experienced traders may have the right level of discipline, experience and time to produce good results with manual trading. However, most of us are emotional beings, we always have little time and we are not disciplined enough and that’s why we believe this is just the beginning of automated trading for retail traders and we look forward to helping more traders achieve better results through automation.
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