There are two great dimensions into which all trading can be divided, autotrading and manual trading. Of course, trading can be also a mixture of both, and it is one, in most cases. The gut trader, doing it all manually, should apply a trading system. This system acts like an automaton. Some things are allowed, others are forbidden. The more rules the system has and the stricter they are, the more equals the whole thing to a complete robot.
Looking at the other side, even the most automatic trading setup needs some decisions that are made by a human. Selecting the market to trade, choosing a broker and of course choosing and configuring your trading software.
Which advantages has manual trading and which ones has its automatic counterpart?
Clearly the autotrading wins with regard to involved work. The perfect automat is completely automatic – there should be not much left for the trader to do. Prices swing up and down and your autotrading demon follows the swings swiftly and silently like a swallow. But autotrading has another big plus. The trading robot is cold as ice, perhaps even colder. It will follow its trading algorithm no matter what.
Contrary to the robot is the human trader the most inexplicable machine there is. Don’t expect it to follow rules, even if they are its own ones. The human trading machine is a revolutionist, but an unintentional one.
If you have problems to stick to your trading system, automate as many aspects of your trading as possible. The start for that could be simply using stop and limit orders. You want to be a successful trend trader? Entering the market with a stop buy order is generally a good idea. Exiting it with a stop sell order is even more consequent.
The big plus of discretionary trading is that a human trader understands the world. In case anything deviates from the normal trading environment, a robot wouldn’t notice it. The trading automaton doesn’t know about wars, destroyed crops, defaults or even good products.
This consideration doesn’t have to be so far fetched. The simple feeling of a trader or the whole market, that now, after a longer downturn, the slightest positive news will ignite the next start, is terra incognita for a trading algorithm.
If, for example, the automaton’s trading formula doesn’t indicate an oversold score above some limit, it isn’t ready to buy. That is the hitch with statistical trading and a trading algorithm is nothing else than applying statistics.
It is hard enough for an investor to judge the competitiveness of a company or the future potential of a product the world has never seen before. But a robot has even severe difficulties to understand what judging means. Worse, it doesn’t understand what understanding is.
There is another smaller argument pro automation and that is precision. A trading formula is of course more precise and a computer faster than the human trader.
Finally, a formula can be extended to a really complex algorithm, something like this neural trading machine, that is said to have produced quite some satisfied beach traders. The complexer your trading algorithm is, the fewer competing traders with the same system are waiting to grill you.