An automated trading system, also referred to as algorithmic trading or a mechanical trading system, is an electronic program that automatically submits buy and sell orders for securities in the financial markets. This type of trading uses complex algorithms to analyze market conditions and place trades based on predetermined criteria. Automated systems offer traders the ability to trade 24 hours a day with minimal human intervention, which can result in higher profits with less risk.
However, there are some drawbacks associated with this form of online forex trading that should be considered before investing. We take a look at the pros and cons of automated forex trading systems in this article.
Pro: Emotions Aren’t Involved
The ability to eliminate human emotions from the trading process is one of the biggest benefits of using an automated trading system. Automated systems are not affected by emotional decisions and allow traders to remain disciplined and consistent with their strategies. This can be especially beneficial when markets become volatile or when a trader feels they may be influenced by emotions to make poor trading decisions.
Pro: Computers Use Historical Live Data Rather Than Guessing
Computer algorithms analyze historical data and apply it to current market conditions rather than making guesses based on human intuition or instinct. This means that automated systems have the potential to execute more precise trades with higher success rates, especially in comparison to an inexperienced human trader.
Pro: They Can Trade Quicker Than Humans
Automated systems are able to make trades faster than a human trader can, allowing for higher profits with less risk. This is because computers don’t need to take breaks or sleep, so they can continually monitor the markets and submit trades as soon as conditions are met.
Pro: They Make It Easier to Diversify
Using an automated trading system allows traders to easily diversify their portfolios across different asset classes. They can also be used to trade multiple strategies at once, which can make it easier to manage risk and maximize profits.
Con: Mechanical Failures are Possible
Despite the accuracy of algorithmic trading, there is always a chance that a mechanical failure may occur. Failures can cause an automated system to miss out on potential trades or even execute orders at incorrect prices. It’s important for traders to monitor their systems regularly and troubleshoot any issues as soon as possible.
Con: They Require Monitoring
As mentioned above, although automated trading can reduce the amount of time a trader needs to spend in front of their computer, it is still necessary for traders to monitor their systems regularly. This is because market conditions change quickly and can cause an automated system to make incorrect decisions or miss out on potential trades. As such, traders need to be vigilant and make sure their systems are functioning properly.
Overall, automated trading systems offer a range of benefits for forex traders including the ability to quickly execute trades and the elimination of emotion from the decision-making process. However, it is important to understand that they can still be susceptible to mechanical failures and require regular monitoring. As such, it is essential for traders to weigh the pros and cons of automated trading before deciding if this type of system is right for them.