Automated trading system – fiction or reality?

Can a piece of software trade the markets successfully? The answer is absolutely yes. The corollary is: “Will you be able to benefit from it?”

To begin a computer has a unique advantage. It does not operate on emotions.  Given the proper algorithm it will trade according to a set of rules, maintaining the same poker face whatever may come.

There are many websites out there who promise wonders but are very discreet in terms of accountability. “Show me your trade log and I’ll believe you” might be what you’re thinking.

Also, you can always pick a group of successful trades out of scores of miserable outcomes. A few results in isolation do not warrant giving up your home-grown system.

What about financial statements and fundamental analysis? The computer can ignore them altogether. As you have heard: “Everything you need to know is already factored in the price!”

If so what are the financial instruments best suited for an automated technical analysis system? Any instrument which can spare you unforeseen hiccups such as trading halts, low liquidity and the like is a candidate. So the preference would be indices, commodities and foreign exchange. By all means blue chip stocks fall into that group as some have such a huge capitalisation they behave like an index of their own.

Still you wouldn’t trust your money to a computer? Well here come the emotions again. This is the one thing that will allow you to benefit or miss out from what an automated system can offer – trust. Today many have swapped their street directory for a navigation device. If you believe a computerized gadget for your driving directions what is your issue?

It is probably the case of fear and discipline. Your ability to take a risk is the one reason you are being rewarded for trading the markets. If you had the nerve to hold on for the long haul and had reasonable expectations you wouldn’t panic at the first retracement.

Such a trading illness can be cured by stepping back into a longer timeframe. Do you look at daily charts? Then look at how things shape up on a weekly or even monthly chart. Then come back to your daily chart and spot an entry point.

Beware. Markets like to revisit your entry point several times if need be to check the support or resistance level. Standing firm on your two feet but having a stop order too close you will get bumped off with a (small) loss. Adding insult to injury the market will now fly off without you and finally reach the target.