Automated Trading Systems — The Verdict!

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Anything that we hear is automatic always makes us feel good. Right? But, why? Why do we seek automation in almost everything in life? This was not the first question which blogged my mind when I began to study about automated trading systems. But, ever found my feet on this one. Whatever be needed, I had to understand this why. Before taking this question further, let me mention a few important facts which are worth a mention here. The term automated with respect to trading systems can be categorized in two ways. One, you have a trading system that filters out the stocks based on its coded algorithm each day, executes your purchase and sell orders for the filtered stocks and even executes the stop-loss or profit exit orders based on the included algorithms. Such a system works like a complete robot taking care of your trading business. You do not even require to place your trades. The only action on your part is validating and approving your algorithms for stock filters, stop-losses and profit exports, which is a one-time action unless you again re-visit to perform any updates to your algorithms at a later time.

Such trading platforms would generally be marketed by the brokerage houses themselves so that the trading system can easily be integrated with your trading account with the broker and they do not require to call, disturb, bore or even irritate you at times for convincing you to trade so that their brokerage goals are achieved. The other category of automated trading system would be defining your trading rules which get converted into algorithms, place the rules or combination of rules into a nice technical analysis software, generate buy and sell signals, but the final implementation of the generated trade opportunities need to be done manually using a brokerage firm. Here, there was a scope of a final review or a gut feel in this category of automated trading system. The former category was always way out of my league anyway. Moreover, I somehow disliked a complete robot system for many reasons of my own. But, not initially. It took me a lot of study and time to realize my dislike for a complete robot trading system. Initially, my thought process was driven towards inventing a complete robot. I wanted to create a money-making-machine as soon as I certainly heared about stock market. The thought was so intense and deep-rooted, that even today; it haunts me once in a while, off course harmlessly. I came up with a few interviews that helped me get rid of the obsession to create a money making machine. Let me list them here.

1. During my journey to being a mature trader with each passing day, I understood that without I myself take control of my trades irrespective of which trading system I developed, the chances to succeed in stock market were low enough to end up being unsuccessful. When I tried to apply the complete robots either by borrowed trading systems or my own creations, I realized that everything and anything of my trading plan was put at the mercy of the designed robot. Now, that may sound like a big irony. The robot which was directed by me would begin to make me feel washed! But, that was a fact indeed. After only days of having started with a robot, I would start to feel not in control of things which my robot was doing. Here, I knew that the complete robot systems can not make me rich in the long run.

2. The trading culture for my country helped in a big way as well. I traded in Indian stock markets and the scope of such automated trade executions was not prominent. However, a synthetic equivalent was possible by giving instructions to your broker.

In the course of time, the thought to build a money making machine faded away and I realized that some human intervention was needed indeed. The focus is clearly moved towards the second category of automated trading system. That is, generate the signals and perform a final review in the form of a gut feel or anything which approves of your decision to go with the generated signal. Some experts would tend to disagree with me in that I am considering this approach as adjusted since human intervention in the form of final approval is capable of affecting the trading decision. However, I consider this approach automated as well. Reason? I noticed that 99% of times, the final approval or a gut feel would go in favor of what your trading system has proposed. Now, that's a huge percentage. Keeping away the rest of the 1%, 99% of your trading signals would still get executed because the final review would work as another robot waiting to put the approval stamp on the generated signal. Why? Because the trading system generating signals as well as the authority approving the signals have a thing common. Who designed the trading system? And, who will approve of the decision to trade? The devil mind! The mind would approve of the signal in the same way that it designed the system. The mind would rarely challenge its own creation! Would you ever honestly challenge and find faults in something which you created on your own? Had it been involved 2 different minds, one creating the system, and the other approving of the signal, it would have worked differently. But, stock trading is a personal business. It involves only one mind.

As the time progressed further, I ever asked myself, why do I need an automated trading system? Is there a definite need of it or there is something beyond the need which I needed to know. Well, I did come to some really concluding facts. First, we run after automation because we are lazy. Yes literally. We are indeed full of inherent dizzy. Let us divide this into a couple of categories again. I love to break things down in order to understand them better. The first category is us as consumers of automation. The word dizzy can be more related to this category. The other categoryfits those who design and produce automation. This recalls me of one friend from IT industry.

He was obsessed with creating automation in whatever he would do. I asked him once "You are able to be very efficient resource using your automation skills. But, if I assume you were assigned only one work in a week, which you automated and executed. So, you must have a lot of spare time. "What keeps you occupied in spare time then?" He confidently responded "I look for automating something else". So I asked again "What would you do if you have nothing to automate?" He responded again with confidence "I will definitely find something to automate always. I love to help people do their work faster." His response gave me a deep insight. The categories of people who are engaged in designing automation have only one purpose. To automate! Some may genuinely feel the cause of helping, but most may have income aspirations by selling their robots.

Here, the purpose of the automation designers no longer remains with the subject that they are automating, but the automation process itself! A fair game indeed. But, the subject is what matters for us. Right? Incase you are lost by now, let me mention here that the subject for us is "Stock market" and deviating from our subject would deviate us from wealth. The subject being automated, however, is of interest to the first category which I mentioned, the consumers. And, I have already tagged consumers of automation as lazy. Keeping the whole history to provide any evidence to me, let me know one example from the entire history known to us, which involves a lazy person having climbed the success ladder. You will find none. This was good enough knowledge for me to understand that automatic systems may benefit me at the cost of my money, but, they certainly may not help me to make money. There bought to be something you should be willing to lose in order to gain something in return. You lose money to gain automation. You lose laze to gain money!

At the ending note, I must mention that a certain level of automation is needed indeed in a good and efficient trading system. However, you must ensure that level remains less enough for you to be driving everything still. If you can achieve this in your trading plan, you will have your feet on the right step indeed!

Thank You!



Gaurav N Sharma