Lately, many traders have been using mechanical trading systems in their trading, and those who do not would like to know more about them. Let's see what it is and why are these systems needed? What good can they give a trader, and what are their disadvantages.
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Determining the terminology
A trading system is a clearly formulated set of rules for trading, i.e. to open and
close positions. The term "trading strategy" is also used. If you
have a clear plan under what conditions to enter and exit a trade, even if only
on paper or in your head, you have a trading system. Go ahead.
A mechanical
trading system (MTS) is a program (or a device, as the term "mechanical"
implies) that automatically places and withdraws orders according to the logic
pre-installed in it, in accordance with the trading system (trading strategy).
It is also possible for the program to perform additional functions at the
discretion of the author of the system - control of placed orders, monitoring
of transactions, analysis of trade, with the provision of charts and reports,
etc. I think instead of the word "mechanical" it would be more
appropriate to say "automatic" trading system, but due to established
traditions, market participants use this term.
There is also the concept of "trade advisor" or "trade
expert". A trading advisor is, let's say, a semiautomatic device
that collects data, analyzes it, performs calculations and reports the results
to a person who makes decisions based on the data received. In the Metatrader
program , which is used for trading Forex, trading advisors and experts are
called programs that can not only issue signals, but also, if the trader
wishes, carry out automatic trading.
Advantages of trading robots
Speed . A trading
robot can track dozens, hundreds of quotations of securities, instantly perform
complex calculations, make a decision and immediately place orders. A person
would never be able to analyze so much information so quickly. Traders who use
large volumes of complex calculations in their trading system, who have
entrusted trading to a robot, get an advantage over their colleagues who trade
in the old-fashioned way. Traders who do not use robots are forced to reduce
the number of traded instruments, increase the used time intervals (timeframes)
and abandon promising, but complex trading systems.
Accuracy. A trading robot
does not make mistakes (unless, of course, an error crept into the program code
when it was created), all input and output data can be calculated with an
accuracy of several decimal places, if necessary. When placing a request, the
robot will not accidentally pick an extra zero and put a comma in the wrong
place. Traders who trade manually can sometimes make mistakes both in
calculations and when placing orders. A well-designed trading terminal can
protect against some of these errors, but there is still a chance for a
mistake.
A trading robot is
not subject to emotions. Many traders, especially beginners, having
undergone an emotional impulse, make deals that contradict the logic of the
trading system, and in most cases, such deals turn out to be unprofitable. A
trading robot always strictly adheres to its logic. He does not listen to
“gurus” in the smoking room who know exactly where the price will go, he is not
afraid of three consecutive unprofitable deals, he does not have a bad mood.
The trading robot
does not get tired, it is ready to work 24 hours a day. You can go about
your business, work, sleep, rest, and your robot will trade. If you trade
manually, you will not be able to spend 100% of the time at the computer, even
if the trading session on the exchange is only 8 hours. By going away from the
computer, a trader may miss an important signal to enter or exit and this can
bring losses.
Scalability. If you want to
add functionality to your trading system, you just need to add the code. For
example, you can receive beautiful reports and charts at any time, you can set
up alerts from the robot via SMS, you can endlessly complicate your trading
strategy. When you trade manually, you need to spend more of your time if you
want to expand your trading capabilities, or even hire additional assistants,
or refuse to expand your activities.
As you can see,
trading robots give traders great advantages, why still not everyone uses them
in their trading? Do mechanical trading systems have no downsides? There are,
and very significant ones.
Cons of trading robots
The complexity of
making a robot (writing a program)... You can develop a great trading
strategy but not be able to program it. Even if you are a programmer, you will
need to learn a new language, and if you are not proficient in programming,
then it will be even more difficult. You can order the writing of a robot, but
you cannot be sure that the programmer will accurately describe the logic of
your strategy in the program and will not make mistakes, and in the future you
may have difficulties if you need to modify the code or expand the
functionality. There is also an option with the purchase of a ready-made robot,
but, in my opinion, this is the worst option - firstly, you must know exactly
how your robot works, and purchased systems are mostly "black boxes",
and secondly, I personally have raises suspicion why the authors are selling
"money-making machines" and not making money on them themselves.
A trading robot can
only use technical analysis. You will not teach how to read his news and
company reports. The robot, in accordance with the signal, can open a position
at the time when the news announced the beginning of a decline in the rate.
A trading robot
cannot make decisions in non-standard situations. It only carries
out the logic laid down in it, and in the event of problems, it cannot change
anything. Of course, the program can include the robot's reaction to some
situations, but it's impossible to foresee everything. For example, if the
connection to the Internet is lost, the robot will not be able to continue
trading or at least close an open position. A manual trader would then call the
broker and close the position, or restore the Internet. The computer may
freeze, the program may close with an error, the broker may not accept the
application or accept, but with a long delay. A trading robot will not be able
to react to all events and this can lead to unplanned losses.
Lack of emotion,
one of the advantages of a trading robot, is also a disadvantage . The robot
can drain all your capital in one day without any hesitation. Consider this
when creating a robot, consider this possibility and do not allow it. For
example, let the robot trade only a part of your capital, or make it so that
when a certain threshold is reached, the robot notifies you and (or) stops
trading.
A trading robot
does not have intuition and does not use it in its trading. Some trading
strategies are based on intuition or use an intuitive approach (although
personally, I would not call it a strategy). For example, many scalpers make
decisions based on their gut. They just look at the quotes and make a decision.
It is impossible to program such a strategy.
Mechanical trading
systems provide traders with new trading opportunities, giving them an edge
over manual traders. In the stock markets, in forex or in the derivatives
market, trading stocks, futures or currencies - a trading robot is always ready
to execute its program. But when using robots to automate trading, traders
should not forget that robots are not perfect, they are not machines for making
money, they are just another useful trader's tool and must be used wisely.
