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An algorithmic trading technique is a type of market trading that involves the use of computer programs with pre-defined instructions. It aims to generate profits and reduce transaction costs. Aside from being more advantageous for market participants, algorithmic trading also allows them to avoid having to deal with human influences.
As BBC stated, in the time it takes Usain Bolt to react to the starting pistol, a high-frequency trading platform could complete about 165,000 separate trades.
It’s obvious that the speed of transitioning via trading bots is an advantage, as traders can outperform those who trade manually, hence, slower. At the same time, the high frequency of trading with robots may be painful if the trading bot is set incorrectly. This will simply lead you to losses in seconds.
In 2012, Knight Capital lost $440 Million in 45 minutes due to a trading software glitch. That’s why either buying or developing a trading robot requires a lot of research and testing prior to trading in real-time.
Of course, there are pros and cons to both buying and building a trading robot. So, which is better for you? That depends on your individual needs and preferences. Keep reading to learn more about both options and how to decide which is right for you.
Pros of buying a trading robot
No one can argue with the growth of usage and importance of algorithmic & data-driven approaches in trading. According to Business Wire, algorithmic trading accounts for nearly 60 – 73% of all US equity trading.
There are many reasons why algorithmic trading is superior to manual trading. It eliminates the risk of missing out on trading opportunities and it can execute complex calculations. We can list the most obvious advantages of using a trading robot, even a purchased, ready-made one:
- Trading robots can take the emotion out of the trading.
When you are trading with a robot, you don’t have to worry about getting too emotionally attached to your trades. This can help you make more objective and profitable decisions.
- Trading robots can help you stick to your trading plan.
If you have a well-defined trading plan, a trading robot can help you execute your plan with precision and without emotion.
- Trading robots can save you time.
If you are using a well-designed trading robot, it can do all the heavy lifting for you. This frees up your time so that you can focus on other things.
- Trading robots can help you make more money.
Trading robots are designed to help you make more money while minimizing your risk. They do this by following a well-defined trading plan and making objective decisions.
According to Daily Investors, most trading experts recommend that no capital is risked until a trading plan is made. A trading plan is a researched and written document that guides a trader’s decisions.
- Trading robots can help you become a better trader. By using a trading robot within a demo account, you can learn how to trade the markets without risking any of your own money. This can be a valuable learning experience that can help you become a successful trader.
As Investopedia stated, careful backtesting allows traders to evaluate and fine-tune a trading idea, and to determine the system’s expectancy – i.e., the average amount a trader can expect to win (or lose) per unit of risk.
Cons of buying a trading robot
- Many trading robots are scams.
There are a lot of trading robots out there that simply don’t work. They’re created by scammers who are looking to make a quick buck, and they often prey on unsuspecting or inexperienced investors.
Basia Hellwig notes that although tested systems exist on the market, potential forex traders should do some research before putting money into one of these approaches.
Prior to buying a trading bot, you should always check as many details as possible. If you are choosing the bot on MQL5.community Market, each robot will have its own page with information about the developer, the trading strategy, backtesting results, and more. You can also find user reviews and ratings on each robot which will help you to make the decision. Each ready-made solution can be tested in a demo mode for free.
- Even the best trading robots can’t guarantee success.
No matter how well a trading robot is designed, there’s always the potential for it to make mistakes. Unfortunately, though, using an algorithmic trading technique can help you make better decisions, it can’t guarantee long-term profitability. There are so many variables that can affect a trade’s movement, that it’s impossible to predict its exact direction.
- Trading robots can be expensive.
Some trading robots can cost thousands of dollars, and while they may promise big returns, you could end up losing more money than you make if they don’t work as advertised.
- Trading robots can be complex.
Trading robots often come with a lot of complex features and options, which can be confusing for investors who are new to trading. If you don’t understand how a robot works, you could end up making costly mistakes.
- Trading robots are a risk.
Investing in a trading robot is a risky proposition. There’s no guarantee that it will make money for you, and you could end up losing your entire investment. If you’re thinking about investing in a trading robot, be sure to do your research and understand the risks involved before you put any money at risk.
“I lost about $100k doing algorithmic trading. <…> Programming for myself and using real money was such an educational experience. Any little bug meant that I could lose a lot of money so I bug-tested the most I’ve ever done in my life. And I did things like writing my own multi-threaded backtester, and working on hundreds of gigabytes of data, so I learned a lot there too.It was a lot of fun, very very expensive fun.”
— Farnsworth | news.ycombinator.com
Building Your Own Trading Robot
Many traders prefer to use custom-made trading systems due to their various advantages. One of these is the fact that the systems can be customized to meet the needs of the individual traders. Thus, the main reason people create custom automated trading systems is that they can make them their own. By carefully choosing the tools that will best suit their trading style, they can create a system that is built to their exact specifications. Before you start developing a trading strategy, it’s important that you know which elements of it will be successful. This will allow you to make a fast and powerful bot that works for you.
A custom-made trading system is designed to meet the needs of the individual trader. Unlike pre-made systems, the one built by the trader is completely customized. Moreover, a custom trading bot doesn’t necessarily mean you have to learn to code. There are special communities and freelance platforms that will connect you with an expert developer to tailor a trading bot for your needs — while also saving you a penny (compared with buying a ready-made trading bot).
- You have complete control over how your robot trades. This means you can test and tweak your trading strategy to perfection before going live.
- You can save a lot of money by building your own trading robot. Commercial robots can cost thousands of dollars, whereas you can build your own for a fraction of the price.
- Building your own trading robot gives you a great sense of satisfaction. There’s nothing quite like seeing your robot make a successful trade and increase your portfolio balance.
- Building your own trading robot can be time-consuming and complex. If you’re not familiar with coding or programming, it may take you a while to get your robot up and running.
- There is a risk that your trading robot may not perform as well as you expect. This is why it’s important to test your robot thoroughly before going live with it.
- If you build a successful trading robot, there is a chance that other traders may try to copy your design. This could cause you to lose your competitive edge.
It’s important to weigh up these factors before deciding whether or not it’s the right option for you.
When you are looking to buy or build a robot for trading, there are a few things you need to take into account.
Here are five tips on how to make the decision:
- Decide on your budget and what you need the robot to do. If you are just starting out in trading, it might be better to buy a robot that is already built and tested. If you have a larger budget and want more customization, you can look into building your own robot.
- Consider the time commitment required to build or maintain a robot. If you do not have the time to dedicate to building and maintaining a robot, it might be better to purchase one.
- Make sure you understand the risks involved in trading before investing any money. Building or buying a robot does not guarantee success, and you could lose money if the market moves against you.
- Do your research to find a reputable company or individual to buy or build your robot from. There are many scams out there, so be careful.
- Decide what is more important to you: buying a pre-built robot that might not be perfect for your needs or building a custom robot that does everything you want but takes more time and effort.