Trading Bots: the Holy Grail?

The use of bots in trading has become more and more popular amongst the financial trading community in recent years.

Unfortunately, when trading and particularly when on the losing side it is way too easy to shift stops and break one’s own rules based merely on hunches and hopes to recover back losses. This does happen sometimes, but other times it can turn out to be a very costly mistake wiping out weeks if not months of profit. Are algorithmic trading systems the solution for this? I’ve once heard a trader that in ideal conditions, he would simply ignore all external news sources and trade based only on price action and if this were the case, surely a robot would perform better than a person?

The main advantage of mechanical trading systems is that they eliminate the two main enemies of traders – fear and greed. This permits a trader to trade what they see while removing the emotional aspect from dealing and the need to monitor the markets continually. However it is important to appreciate that most trading strategies will still have at their basis technical analysis fundamentals and will as such be ruled by parameters which hav

David Jones at IG Index notes that trading systems and robots are moving in along with technology and becoming more sophisticated than ever before, however he warns that some traders have misguided perceptions on what a trading robot can achieve for them. Trading bots are not by themselves the Holy Grail and spending a couple of hundreds on a bot won’t guarantee success. A trading robot, no matter how complex doesn’t equal to profits in spread betting.

For instance, if you create your own bot which is designed to place a spreadbet for you on the FTSE to finish up every day that the FTSE is up in the first hour of trading, you are only going to profit if your own calculation that the first hour of trading determines the direction of the FTSE for the trading session is correct.

‘Some people seem to think that bots are the Holy Grail, and that by spending, say, £80 on a trading bot, they are plugging in a magic trading system that will permit them to just sit at home and count the money coming in. That perception is out of line with the reality.’ David says.

A software programme can help you analyse a market but it can’t tell you what to do and what is the right decision to take. A world full of application programming interfaces and bots is perhaps an indicator of things to come but it can’t substitute human judgement.

Algorithmic trading systems are particularly suited to foreign exchange which is mainly driven by macro factors as opposed to shares trading which can be prone to information that is not priced in like directors dealings and other inside information.

Nor are algorithmic trading systems the holy grail and in fact some analysts have blamed such systems as to why the markets can be really choppy at times. For instance the 2010 Flash Crash has been attributed on rogue algorithms accelerating moves as participants sold in a frenzy.