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Does automated trading work?

Automated trading may sound like an easy way to succeed in day trading, after all, with the advent of Artificial Intelligence and ever advancing computer algorithms, then surely an automated trading system that takes away any possibility of human error or emotions would seem like a god-send.

But does automated trading work and can you become a successful and profitable trader through using an automated trading system?

That’s what will be discussed in this post as well as the pros and cons of automated trading systems and whether or not they are a good fit for you.

But before we get into any discussion around automated trading systems, it’s important to always keep in mind that having a good foundation in the fundamentals of day trading and market movements is crucial as a starting point before considering automated trading.

Does automated trading work?
In this post look at the question of ‘does automated trading work?’, and if one can become a successful and profitable trader through using an automated trading system?

What is Automated Trading?

Automated trading, also known as algorithmic trading, algo trading or mechanical trading, refers to the use of computer algorithms to execute trading strategies in financial markets. Instead of human traders manually entering buy or sell orders, automated trading systems rely on predefined rules and algorithms to make trading decisions and execute trades.

Basically, an automated system will execute trades based on the programming logic or trading strategy that has been programmed into the automated trading system.

Automated trading differs from manual or discretionary trading in several ways, the most definitive difference would be human input or intervention.

With manual or discretionary trading, everything about the trade set up and execution is completely down to the human traders discretion and this includes why, when, how much and of course when and why to exit a trade and take profit or use a stop loss to cut a losing trade.


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Is automated trading effective?

One could say so.

After all, a significant portion of trading activity on major exchanges is executed through automated or algorithmic trading. These systems are employed by various market participants, including institutional investors, hedge funds, proprietary trading firms, and even some retail traders.

Automated trading systems on U.S. stock exchanges operate based on computer algorithms that analyze market data, identify trading opportunities, and execute orders at high speeds. The use of algorithms allows for rapid decision-making and execution, often in milliseconds, which is crucial in today’s fast-paced electronic trading environment.

Automated trading systems on U.S. stock exchanges operate based on computer algorithms that analyze market data, identify trading opportunities, and execute orders at high speeds.

Is automated trading right for me?

Automated trading could be a good fit for your day trading if you’re looking for a system that helps you to trade according to predefined parameters. This can be especially helpful when trying to avoid emotional trading. Automated trading is a good solution for someone who wants a low maintenance trading strategy that relies on advanced technology.

But always remember that any automated trading system is only as good as the input or programming that has been used to set up the system.

This includes the trade set ups, time frames entries and exits of any trade and it also requires back testing to identify a profitable trading system that can then be programmed into an algorithm and automated.

There are ‘off-the-shelf’ automated systems or algorithms that can be purchased but these require upfront costs and an investment in order to make use of these systems as well as a certain level of technical knowledge in order to set up these automated systems on the trading platform you will be using.

What are the Pros of automated trading?

Automated trading offers several advantages that all day traders can take advantage of to be profitable. These advantages also contribute to the popularity of automated trading among traders and investors. 

i) Speed and Efficiency

Automated trading systems can execute trades at extremely high speeds, reacting to market changes in milliseconds. This speed is often beyond the capability of human traders, providing an advantage in terms of timely order execution.

ii) Discipline 

Automated trading systems strictly follow predefined rules and algorithms. They are not influenced by emotions, such as fear or greed, which can sometimes lead to irrational trading decisions. This discipline helps maintain consistency in trading strategies.

iii) 24/7 Operation 

Automated trading systems can operate continuously, 24 hours a day, without the need for human supervision. This is particularly beneficial in global markets where trading occurs in different time zones.

iv) Diversification 

Automated trading systems can simultaneously execute trades across multiple instruments and markets. This allows for diversification of trading strategies, reducing the risk associated with relying on a single asset or market.

v) Reduced Human Error 

Automation minimizes the risk of human errors associated with manual trading, such as entering incorrect order details or making decisions based on emotional reactions.

vi) Risk Management 

Automated trading systems can include built-in risk management features, such as stop-loss orders and position sizing rules, to help protect against significant losses.

vii) Elimination of Emotional Bias 

Emotions, such as fear and greed, can cloud judgment and lead to impulsive decisions. Automated trading eliminates emotional biases, ensuring that trades are executed based on logic and predetermined criteria.

automated trading
Two key pros of automated trading are the reduced human error and elimination of emotional bias

What are the Cons of automated trading?

While automated trading offers various advantages, it also comes with certain drawbacks and challenges. 

i) Technical Failures 

Automated trading systems are reliant on technology, and technical failures such as connectivity issues, server outages, or software glitches can occur. These issues can lead to missed opportunities or, in some cases, unintended and significant financial losses.

ii) Over-Optimization 

In an attempt to make algorithms perform well in historical backtests, traders may over-optimize them. This can result in algorithms that are too specific to past market conditions and may not perform well in different or evolving market environments.

iii) Lack of Flexibility 

Automated systems operate based on pre-programmed rules. If market conditions change unexpectedly or deviate from historical patterns, these systems may struggle to adapt, potentially leading to losses.

iv) Market Dependency

Automated trading systems heavily depend on accurate and timely market data. If there are delays, inaccuracies, or gaps in data feeds, it can impact the performance of the system.

v) Unexpected Market Events 

Black swan events or other unexpected market occurrences that were not accounted for in the algorithm’s design can lead to substantial losses. Automated systems may struggle to handle unprecedented situations.

vi) Complexity and Maintenance 

Designing, developing, and maintaining automated trading systems can be complex and require ongoing attention. Regular updates and adjustments may be necessary to ensure the system remains effective in changing market conditions.

vii) Costs

Implementing and maintaining automated trading systems can involve significant upfront and ongoing costs, including software development, data feeds, and infrastructure expenses.

viii) Regulatory Risks

Depending on the jurisdiction, there may be regulatory challenges and uncertainties associated with automated trading. Compliance with regulatory requirements is essential to avoid legal issues.

Does Automated Trading Work? Final thoughts

At the end of the day automated trading can and does work and this is evident in the large-scale use of automated trading systems by large firms trading on stock exchanges around the world.

And, automated trading systems provide a more systematic approach to day trading that also removes human emotion and error which can be a major factor in the success and failure of day traders. But it is always best to begin with simplifying day trading before building complexity with strategies such as automated systems.

And based on the pros and cons discussed in this post, it’s possible that automated trading may not be the best option for you as someone who is starting out in trading or someone who lacks the finances and technical knowledge required to make use of automated trading systems effectively and profitably.