There is a lot of discussion about automated trading and manual trading. One of the main things that caused these discussions is the increasing number of automated trading systems in the marketplace. There are thousands of crypto trading robots out there, and almost everyone claims to turn tiny accounts into millions of dollars overnight.
In this article, we explore the differences between automated trading and manual trading. While manual trading has been around much longer, automated trading is now more readily available to retail traders which has only intensified the debate on which style is best. Let’s dig a little deeper into both and review the advantages and disadvantages.
Manual trading is where a trader makes a decision on when to buy or sell an asset and then place the trade themselves via market or pending orders. The manual trader scans multiple markets first to actually find an opportunity before deciding to act. In essence, most of the work is done by the trader which means their output is only as good as their input.
Automated trading is where a pre-programmed algorithm makes all the decisions on what to buy and sell and when, based on the instructions written in its code. A trader, programmer, or quant may code their manual strategy so when certain rules or events occur, the algorithm automatically take trades.
When it comes to deciding which style of trading is actually best, there are various factors at play such as experience, time, and resources available. Below is a list of the pros and cons for each type of trading style:
– Completely removes emotion from trading decisions. Most new traders struggle to keep on trading a strategy when they have had a few losing trades, thereby never achieving a consistent set of trades to allow a statistical edge to work in their favor.
– Traders can build a portfolio of different systems to cover different market conditions allowing for a level of diversification in their approach. As the algorithm can also show all the previous historical trades, traders can quickly identify whether a system has worked historically and gain useful statistics to understand when it will stop working in the future (such as exceeding historical consecutive losses, etc).
– New traders can start with a demo account to test different strategies available for free or purchase one from the MetaTrader marketplace. This is a useful way to see if auto trading is actually right for them.
– The past does not guarantee the future. Just because a system has worked historically, it does not mean that it will work in the future. Market conditions change, volatility changes, trends change, etc.
– It is very easy for auto traders to over-optimize their system and change criteria to make their historical results look fantastic. Known as “curve fitting” among auto traders, it is a very common issue. While traders may find the best variables for their system on historical data, it doesn’t predict future price data.
– Hiring a programmer to help code a trading strategy is costly. Any optimizations or changes may also require more costs to investigate and amend. The other option is for traders to learn how to code themselves, which for most would be another con.
– Traders have to learn about the market they are trading, the tools they are using, and the methods of making trading decisions such as technical analysis and fundamental analysis. This is a great way to build knowledge about trading, which can then be useful when trying to devise an automated trading system.
– In manual trading, traders have a bit more control on what to do. From a mindset perspective, this is powerful. Especially if a trader is trading on live money. Knowing that you have a trade on, inputting the details and seeing the stop loss on the chart yourself can help to feel more settled in managing an account.
– With manual trading, a trader can actually identify what is working for them and what is not working for them. Typically, most traders struggle with the mindset aspect of trading and even more specifically, taking losing trades which is an inevitable part of the business. But by understanding what is not working, they can work on it to become better.
– Manual trading takes time. The trader needs to perform research, be there to place their orders, and spend time reviewing their trades and individual behavior to try and reach superior performance. Some of these tasks can be semi-automated though. For example, a trader could use pending orders to instruct their broker to close trades at profit or loss at certain predetermined price levels.
– A disciplined mindset is required to trade successfully. Many traders often let their emotions get to them and start to “gamble.” It is up to the trader to maintain discipline in risk management at all times, making sure they don’t risk too much to allow for losing trades, making sure they actually trade consistently to allow a statistical edge to work in their favor and making sure they focus on their processes rather than all the noise (people’s opinions).
– Many manual traders struggle with being solely accountable for their trading account and will often blame their strategy or their platform or their broker rather than look internally at their own behavior and decision-making abilities.
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