Many people are lured to the markets by promises of easy money via day trading robots or expert advisors (EAs). An EA, or trading robot, is an automated trading program that runs on your computer and trades for you in your account. Selling robots and EAs online has become a huge business, but before you take the plunge, there are things to consider.
There are certainly some benefits to automating a strategy, but there are also some drawbacks. The thing to keep in mind is that rarely is making a boatload of money easy. The promise of easy money is the oldest trading scam in the book. There is money to be made with trading robots and learning to automate strategies. Unfortunately, to this do effectively could actually take longer than simply learning how to trade manually, since a person needs to learn how to trade first, and then still learn how to automate the strategies via a programming language. And buying a program comes with loads of pitfalls, which will be discussed shortly.
Below, we look at all of this, and more, exploring the pros and cons of robotic trading and EAs.
What Is Automated or EA Software?
Automated trading software goes by a few different names, such as Expert Advisors (EAs), robotic trading, program trading, automated trading or black box trading.
Automated software is a program that runs on a computer and trades for the person running the program. Since it is a program, it will only take trades with parameters that align with what is written in the program. Creating a trading program requires extensive trading knowledge, as well as programming skills.
EAs are based on a trading strategy, so the strategy needs to be simple enough to be broken down into a series of rules that can be programmed. The more complex a strategy, the harder it will be to effectively program.
For people who buy trading software, they are completely dependent on the trading skills and programming skills of the person who wrote the program. This is a vulnerable position to be in.
Like most software, it will require an update from time to time. Market conditions change, and the trading software needs to be updated with it. If the software is not updated by someone who knows what they are doing, then it is quite likely the software will have a very short shelf life of profitability (if it was profitable, to begin with). EAs that are written by and maintained by experienced traders and programmers have the best chance at maintaining profitability over the long-term.
Beware the Sales Push
While a few EAs will work, and produce good returns, most will not. An incredibly small percentage of people who attempt day trading are successful at it, and that includes people who create and buy EAs. The odds of success are still very small even when using a trading robot.
The people who are successful with EAs constantly watch how their EA is performing, make adjustments as market conditions change, and intervene when uncommon events occur (random events can occur that affect the programming in unexpected ways). Successful robotic traders, just like successful manual traders, put in the work required to create and maintain profitability.
This is quite different than the EAs sold online that describes a life of easy money and no work... all for $79.95! Once you buy an EA, rarely is there support and updates after the fact. Even if the creator of the EA is successful, that doesn't mean someone who buys the EA will be. The creator may occasionally intervene, or turn the program off (during major news events, for example). Slight changes to when the program is run can change results dramatically. Unless the creator of the program is coaching you on how to do this or providing long-term updates and monitoring as market conditions change, it's best to avoid getting sucked into the sales pitch.
Rarely Is Automated Fully Automated
As alluded to above, successful robotic traders put in a lot of work to creating and maintaining their programs. The real work is maintaining the program. Someone cannot simply flick a switch and watch the money roll in while doing nothing. This may work for a time, but market conditions change, and unexpected events occur, which require intervention on the part of the trader.
If a person buys an EA, it is unlikely they will have the expertise to know when to intervene and when not to. Intervening, when not required, could turn a winning strategy into a losing one, just as not intervening when required could drain the trading account in a hurry.
In the Market Wizards book series by Jack Schwager, several successful automated traders are interviewed. All these traders were highly engaged with their strategies, and not just sitting back doing nothing. It is highly unlikely that a person can buy an EA and just leave it running while they sleep and work at another job. This approach may work, but only if they stay on top of the EAs performance, know how to alter the program if market conditions change, and know how and when to manually intervene when required.
Some people think that robotic trading takes the emotion out of trading. Unfortunately, this is not true. While the program doesn't feel emotion, the person running the program does. People may feel tempted to intervene when they see the program losing money, but the program may still be functioning well (losing trades happen). Or they may intervene to take profits prematurely, manually overriding a trade when the person sees a profit they like. All these emotionally-driven actions could destroy an EAs profitable edge in the market.
Automated traded is rarely auto-pilot trading. It takes a lot of knowledge to be able to maintain an EA, and trading skills/psychological skills are still required to intervene when necessary, but not too much.
Pros of Automated (Robotic or EA) Trading
- EAs remove some of the psychological pressures of trading. However, people using an EA still need to know when to intervene and when not to.
- EAs react more quickly than humans can. When a trade signal appears (to enter or exit), there is no hesitation on the part of the EA. Humans, on the other hand, may freeze or question the trade. The lightning-fast reaction time of the EA is beneficial in fast-moving market conditions.
- Automated software can monitor far more markets than a human can. At any moment a human can only effectively monitor a few markets, but an EA can monitor hundreds. Once let loose, an EA can find opportunities in all the markets it is programmed to monitor. EAs can take advantage of more opportunities than a human can.
- They will take trades that suit a strategy, even if the trader feels otherwise. if the strategy has proven itself profitable, this is a good thing.
- They force the trader to simplify a strategy down to a level where it can be programmed. This process gives traders an in-depth look at their strategy. People who buy EAs don't receive this benefit, and they often don't know what is "under the hood."
- While some intervention is required, once a trading program is created, it may require minimal maintenance for long periods of time. This means that for certain periods of time an automated trading program may be less work than trading manually. When a program needs work though, it may require a lot of time.
- Automated trading is the truest test of whether a strategy is viable or not. Manual trading has too many variables, whereas a program just does what it is told. Automating and testing a strategy is a good way to see if a strategy is viable under current market conditions.
- Once a strategy is automated, it can be easily tested in different market conditions (using current or past price data). This will reveal weakness and strengths of the program. For example, it may perform well in trending markets, but poorly in ranging markets. This data can then be used to alter the program or to show the trader when it is appropriate to intervene and turn the program off or on.
Cons of Automated Trading
- It still requires a lot of work to create and/or maintain the program.
- Manual intervention is occasionally required, meaning automated trading is not fully hands-off. For example, if volatility increases much more than normal then position size may need to be manually altered.
- Some programming skills are definitely desired. Even if buying a program, most don't come with long-term support or updates as market conditions change. If you don't know how to alter the program, the program will eventually be useless (unprofitable).
- Buying a program means not knowing what is under the hood. One of the benefits of automating a strategy is that it forces the user to really know the ins and outs of the strategy. That benefit is lost when buying someone else's program.
- The user will still face psychological pressures, such as wanting to intervene when the program is going well (protect profits) or doing poorly (protect capital). There is also the psychological pressure of deciding when it is the right time to intervene.
- It's unlikely that buying an EA online will produce positive long-term results. It may work for a short period of time, but ultimately the person using it needs to maintain it, and know when to intervene and when not to.
- To create your own EAs, trading, and programming skills are both required. The trading skills are required to create the strategy that will be programmed.
- Since automated strategies can be easily tested, that leaves them open to over-optimization. Over-optimization is when a program is fine-tuned to create the highest profit on past price movements. While this may make the program look very profitable in the past, optimization often leads to poor performance in the future. Also, since tests can be easily run, EA salespeople will often only show the periods in which the program performed very well. A test of the strategy can be performed for any period in history, so it leaves it open to a lot of tinkering with the statistics. Keep this in mind when viewing automated trading statistics. Ideally, statistics should be based on live trading and not run on simulated or backtested data.
Final Word on Using Automated Trading Software (EAs)
Automated trading can be a beneficial and profitable skill to have, but typically it can't be purchased for a few dollars on the internet. Automated trading takes a lot of work and skill. To effectively create and maintain an EA, a trader needs both trading and programming knowledge. Robotic trading also requires time. It is not something to set and forget. It needs to be routinely checked, and manual intervention may be required when random events occur or market conditions change.
Learning to automate strategies is a worthwhile endeavor though. Automating a strategy requires in-depth knowledge of the strategy and makes testing it strategy very easy. If a simple strategy can be programmed, seeing how that program performed recently may provide insights into how it will perform in the future. EAs can monitor more markets for trading opportunities than humans can, and can react quicker when trade signals occur.
Don't get lured into sales pitches that promise easy money if you buy an EA. Time is better spent learning how to trade, and then acquiring some programming skills if you want to automate your strategies.
Frequently Asked Questions (FAQs)
How do you make a stock trading bot?
If your brokerage gives you access to the code that powers the trading software, then you can create a trading bot based on your trading strategies. This is more easily said than done, since designing a bot from scratch would likely require significant programming experience.
How many trades per day can I do with a trading robot?
Trading limitations depend on the market being traded. For stocks and ETFs, traders are limited to three trades per week unless they have at least $25,000. Futures and forex markets don't have trading limitations, but brokers typically require larger opening deposits for these types of accounts.