Due to Tesla, Apple, and Amazon stocks’ meteoric rise, people have started taking trading more seriously. Bitcoin has also experienced unbelievable gains, with a lot of traders using trading bots for crypto trading. This makes one wonder whether there is something to automated trading.
Trading bots are worth it for beginners as they automate the execution of trades based on timeless financial advice with little to no fee on transactions. Wealth management firms are known to use such software to manage clients’ money, and now, these services are directly available to investors.
In this article, you will learn more about trading bots and their pros and cons. By the end of this piece, you’ll be able to decide whether you should get yourself an automated trading system.
IMPORTANT SIDENOTE: I surveyed 1500+ traders to understand how social trading impacted their trading outcomes. The results shocked my belief system! Read my latest article: ‘Exploring Social Trading: Community, Profit, and Collaboration’ for my in-depth findings through the data collected from this survey!
Table of Contents
Trading Bots: A Brief Overview
Day trading stocks is an entirely different game compared to long-term investing. While investing leans on business fundamentals to perceive underlying value before the market catches up and raises a business’s valuation, technical-analysis-driven day trading focuses on market behavior and drawing patterns to get ahead of most investors.
Since technical analysis relies on processing data, most practitioners (also referred to as quants) rely on computed programs to decide their positions. Thanks to the mainstream attention received by Silicon Valley in 2008, there had been an increased emphasis on digital native and SaaS businesses that adopted the blue ocean strategy to find new methods of monetization.
Trading bots rose to popularity around this time as an alternative, low-cost money management solution. They were essentially a retail-friendly version of the algorithms used by Wallstreet quants. While portfolio managers used these bots to manage clients’ active trade portfolios, the first bot made available to the public was Betterment by Jon Stein.
Trading bots, or formally called the automated trading system, have since evolved thanks to the leaps in artificial intelligence technology. Today, you can create different objectives, including a diverse portfolio and high-return investments. Human interference has been minimized, but the implications of mass adoption are yet undiscovered.
Do Trading Bots Really Work?
In the day trading space, trading bots hold a unique position where they play against a vast pool of humans. Not only do they have better, unbiased, processing ability but they also have access to a large quantity of data regarding past market behavior. The results are quite obvious.
Trading bots really work and beat human decision-makers most of the time because they can play without giving in to cognitive biases like deprival super reaction, social proof, and likability. Wealth managers used Robo-advisors to handle smaller clients way before these were made available to the public.
The question, then, shouldn’t be whether they work. It should be whether the bots will keep working if everyone uses them. In that case, it would be a game of robots playing against each other. Because of our tendency to think in black and white, two attitudes have developed around trading bots.
The first dismisses the algorithms altogether, and the second hails Robo-advisors as a revolution that will lift the low, middle class out of poverty. One would assume that quants would all back Robo-advisors, but because of partial conflict of interest and part skepticism, they aren’t all fans of retail-friendly investing algorithms. Who would advocate for the robots that might eventually replace them?
Trading bots have moved past being super-quants at this point; they can now be designed to look at fundamentals and seek to uncover unrealized value. Since both technical analysis-driven investors and investors motivated by fundamental analysis can benefit from using trading bots, let’s look at their pros and cons.
Pros of Trading Bots
Even if you are initially skeptical about automated trading systems, you should look at the advantages they bring to an investor’s arsenal. Here are some of the benefits available to a robot advisor user:
They Minimize Cognitive Biases
If you’re making a purchase, you might believe that it is your free choice, but there exists a whole science to influence that leverages your biases to make certain offers too compelling for you to resist. Here are some of the cognitive biases acting upon your decision making:
- Confirmation bias: If you start out thinking a particular stock is good, you’ll overlook indicators implying it is bad and only seek what confirms your hypothesis.
- Likability bias: You may invest in a stock because you like the CEO’s personality.
- Curiosity bias: You may hold a position because of curiosity regarding its future.
- Inconsistency avoidance tendency: You may panic and sell your stock the moment there is a drop and miss out on future gains.
While the above are four biases picked at random for illustration purposes, over 180 cognitive biases have been discovered to date. Using an algorithm to make trades on your behalf undoes the potential adverse effects of this decision-making.
Regardless of whether you’re using trading bots for stocks or using trading cryptocurrency with robots, like Cryptoblizz, you will have the advantage of removing cognitive biases from the process.
They Subtract Emotions From the Equation
The emotional investor isn’t ever the victor. One must know better than to let emotions interfere with profits but news media, including financial news, is emotionally driven and sensational. Active traders can lose a lot of money by giving in to their emotions.
An algorithmic trading platform can stay steady and follow the rules decided calmly by the trader. In a way, a trading bot is a way of automating calmness. Being calm is essential, especially in spaces like forex. Consequently, there are trading bots like GPS Forex Bot that cater to this exact market.
Better Backtesting
When you say “thank you” to someone, how are they likely to respond? Usually, with the words “you’re welcome”. You know this from experience. Humans rely on personal experience to build predictive models of the future before making their decisions. From driving safety to boarding a flight, a lot depends on our knowledge based on previous experiences.
However, compared to the vastness of the market, our personal experience is relatively minute. Therefore, market history is a much better indicator, and backtesting allows you to test your rules with stocks and securities by applying them to the past market performance.
When backtesting simple ideas doesn’t require an algorithm, using a trading bot can allow you to backtest rules instantly, which brings us to the final advantage of these robots.
Faster Speed of Trade Execution
Because day trading, cryptocurrency trading, and forex are all time-sensitive, having even a fraction of a second upon the rest of the market can bring about unbelievable gain or avoid immense losses. Automated trading systems execute trades faster than humans, making them more profitable, provided the decisions are accurate.
Cons of Trading Robots
Disadvantages of automated trading don’t come as much from the concept but the execution. Since there are multiple bots on the market, you have to be careful which one you pick. Here are some drawbacks specific trading bots might have:
- Technical failure: A trading bot might suffer technical failure when you need it to sell or buy certain shares. To avoid this drawback, you must get a program that doesn’t have a history of such failures.
- Not completely hands-off: Another issue with trading bots is that they aren’t completely hands-off. You have to keep an eye on connectivity, see if the robot is working, and fix any errors or dialog boxes that might appear and prevent functionality.
- No guarantees: Although robots generally outdo humans in execution time and backtesting, the rules of investing are ultimately decided by humans. These could be flawed, and the robot might not beat the market long-term. You can diversify by using multiple robots and giving each access to smaller funds.
Author’s Recommendations: Top Trading and Investment Resources To Consider
Before concluding this article, I wanted to share few trading and investment resources that I have vetted, with the help of 50+ consistently profitable traders, for you. I am confident that you will greatly benefit in your trading journey by considering one or more of these resources.
- Roadmap to Becoming a Consistently Profitable Trader: I surveyed 5000+ traders (and interviewed 50+ profitable traders) to create the best possible step by step trading guide for you. Read my article: ‘7 Proven Steps To Profitable Trading’ to learn about my findings from surveying 5000+ traders, and to learn how these learnings can be leveraged to your advantage.
- Best Broker For Trading Success: I reviewed 15+ brokers and discussed my findings with 50+ consistently profitable traders. Post all that assessment, the best all round broker that our collective minds picked was M1 Finance. If you are looking to open a brokerage account, choose M1 Finance. You just cannot go wrong with it! Click Here To Sign Up for M1 Finance Today!
- Best Trading Courses You Can Take For Free (or at extremely low cost): I reviewed 30+ trading courses to recommend you the best resource, and found Trading Strategies in Emerging Markets Specialization on Coursera to beat every other course on the market. Plus, if you complete this course within 7 days, it will cost you nothing and will be absolutely free! Click Here To Sign Up Today! (If you don’t find this course valuable, you can cancel anytime within the 7 days trial period and pay nothing.)
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Conclusion
Trading bots are a great way to execute trades based on rules you are confident about. With minimum execution time and great backtesting, these programs can help you find stocks with strong fundamentals and ones with great short-term trading potential.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
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