What is an Automated Trading System?
In our last post on the benefits of Automated Trading, we mainly spoke about why you should consider making the switch from manual to automated trading. The key reasons we believe are the elimination of emotion from your trading decision, back-testing which sets the stage for your trading bot by judging the bot’s viability using historical data without you having to put in actual money, inculcating consistency in your decisions and of course saving your time and energy.
However, knowing all these advantages of shifting to Algo Trading, we wish to share with you the probable risks that you should be wary of. Never come into a deal knowing the other side of the bargain. Most traders get into automated trading thinking they would not have to worry about their trades and completely rely on their trading bot.
Risks come from not knowing what you are doing.– Warren Buffet
So here we give you the 3 key areas that you need to watch out for when entering the world of Auto Trading
1. Over-Optimization Risk
The search for finding the near perfect trading strategy can lead to users constantly tweaking and adjusting parameters. While on paper during the back-tests, you may churn out a 100% profitable trade which would never experience a drawdown, in reality, however, the live runs would hold a threat of turning out undesirable results leading to a completely failed strategy. See how Mudrex Testing Console works and how you can optimize your trade using it.
Automating your trade does not mean that you don’t check up on it every now and then. Automated trading technology is highly dependent on resources like the internet and the able functioning of servers. However, these factors are subject to anomalies like internet outages due to natural or man-made causes, inability to understand irrational markets, etc. In such a case, there is a possibility of incurring a financial loss. As a result, it becomes a necessity in monitoring the strategy at regular intervals. Also, despite the elimination of human emotions, it is still human nature to check on a trade whether you are making money or not, especially if it is a significant amount of money. A sail is smooth till the tides hit. When strong tides hit, even the best of ships can sink if you don’t captain it well.
3. Lesser Autonomy
Switching to automated trading means giving up your discretionary choices. Given the current situation in the market (uncertain economic times due to the global pandemic) could cause your crypto charts to behave unpredictably. In such situations especially, the urge to enter/exit based on current market analysis would not be in your hands at least mid-trade. This makes it even more crucial to ensure the effectiveness of your initial analysis. So, enter if you can let a bot take decisions for you.
Bottom line is to take automated trading with a pinch of salt. Do sit back and relax but keep a close eye on how your bot is performing, maintain your trading strategy and stay vigilant on abnormal market behavior.
A few quick references below:
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