Does automated trading really work?

29 Maggio 2023 - 12:42

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Do automated trading and Passive Income Really Work? Here are the differences between the operations of retail and that of professionals.

Does automated trading really work?

For some, it is a real fairy tale to have a trading system that does everything for us, that opens and closes operations and manages risk appropriately. All this would help increase earnings automatically, generating what is now defined as "passive income". This goal is a pseudo-guru mantra, selling automatic bot systems that on paper are fabulous but which in reality prove to be anything but.

Investment funds also often use automated systems to implement strategies and risk management, but they have nothing to do with earning automatically, effortlessly and without noteworthy human intervention.

So let’s see what is the difference between automatic trading implemented by professionals, and the fake systems promulgated by phantom trading gurus who usually have no experience with the markets.

Automated "BOTs" and scams

We are talking about what we define as “Automatic BOTs”, i.e. robots that trade for us, automated trading systems that promise to generate returns automatically, effortlessly and without human intervention. They are usually offered to the retail public, which in this sense does not ask questions about the work of trading and how the markets work.

Usually the presentation of these bots is accompanied by a “track record” showing the results of the bot in question, where there are usually stellar returns and spectacular risk management. Going to analyze most of these bots, which were once called Expert Advisors (EA), execute orders that are difficult to replicate and a careful analysis of the numbers that underlie the track record can bring out all the critical issues of the bot in question, usually related to money management and order execution, fundamental elements in building a track record worthy of being called such.

Furthermore, the belief that trading can be easily automated is leveraged, that an entry deriving from the trading activity of a robot programmed to earn on the market can easily be made automatic. Unfortunately, there is no truth in trading automatism as a possible solution to an "easy" secondary entry.

If someone had an automatic bot that made easy money on the markets, why would they sell it? What’s the point of selling a self-earning robot instead of a discretionary trader?

If there was a long-term robot that could make you money, it wouldn’t be on the market as a competitive tool and therefore it would be inconvenient to offer it on a commercial level. Not to mention the attractiveness that these bots would have on the high-level asset management market, such as that of family offices and hedge funds.

In short, there are basically no theoretical and practical assumptions for an automatic bot to be in fact reliable when it is offered to the retail public.

Professional Automated Trading

True automated trading is usually used by professional prop traders, hedge funds and banking institutions. The uses are different but the basic concept is always to use such a tool to maximize the profit of one’s trading operation.

For example, as far as prop trading is concerned, an automated system is usually accompanied by multiple automated systems that operate simultaneously, otherwise hybrid trading is done, i.e. where the automation of a trading strategy is combined with a discretionary intervention by the prop trader.

As far as hedge funds and family offices are concerned, the logic remains the same. Usually, the heavier a market player is, the more the automated system is supported by a hardware structure of a level that is difficult to replicate by a retail trader, furthermore the approach totally changes.

For example, the automated trading systems of large financial institutions are usually tied to the execution of orders in a period of time in which a human would not have time to intervene. We can take, for example, trading systems that exploit arbitrage and which require a hardware and system structure of such a level that there is competition among competitors even as regards the cutting-edge of the hardware structure used.

Furthermore, there are investment funds that use automated trading systems but which are basically supported by the study and implementation of figures such as the Quant Traders and the Quant Researchers who, thanks to their high quantitative programming skills , are able to structure pricing systems that will then be useful to traders to make profits on the markets in specific conditions.

In essence, quantitative trading done seriously is for the few. Furthermore, when it comes to automatic trading, there is always a human intervention that modifies and adapts the system to the market conditions that arise in a given period.

Automated or Discretionary Trading?

Let’s start from the fact that before being able to learn the basics of automated trading, one should start from discretionary trading, i.e. that operational approach where the trader experiments on himself the experience of operating on the financial markets, meeting many difficulties, studying various approaches always trying to improve in order to find your own risk and money management with its own operating structure.

This work cannot easily be replaced by an automatic bot, a tool that makes the difficult seem easy and at the same time creates further illusions in the difficult world of retail trading, a world where unfortunately we think we can get rich easily and effortlessly in no time.

Profit always requires the construction of a professionalism, given by study and experience, steps necessary to be profitable on the financial markets, elements that we absolutely cannot find in the purchase of an automated bot that does everything for us.

Original article published on Italy 2023-05-26 17:16:01. Original title: Il trading automatico funziona veramente?

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