Man vs machine… which is better when it comes to trading? After all, there is a lot of money at stake in trading. But despite being around in a serious way for the last 20 years or so, automated trading is still not endemic in trading strategies.
But first, what are the basic differences?
Manual trading is the traditional way. A trader looks at a variety of factors to assess the ‘health’ of a business and the potential for loss and profit based on those factors. Those might include the value of the physical stock, the historical performances of senior managers, and of course how the stocks have performed in the past. Armed with the right information, the trader will look at the risks and make a calculated decision as to whether to invest and how much to invest.
As the name suggests, automated trading is created by machines using algorithms. Because of this they can trade stock to the smallest portions of a second and can of course process data much faster than a human. Automated trading looks at scenarios and can monitor small and sudden pricing changes, for example, to increase profit. A trader can also decide how much automation to use.
There are advantages and disadvantages to both.
Manual traders can react to breaking news and have more flexibility with sudden changes to the shares whereas algorithms trade on scenarios. Manual traders work within a trading system and are subject to human emotions – fear, greed, and human error.
Automated investments are super-fast and remove the need for human decision-making. Trader can still set their own parameters when it comes to automated trading.
It’s worth noting here that there are different traders too. Retail traders are individuals trading for individual accounts, whereas institutional traders trade for securities not available for retail traders and would often be requested for IPO investments.
An automated trader can have multiple strategies running at once but is also subject to any risks of an automated trading system – drops in connection or mechanical failures.
Backtesting is part of a quantitative or automated trading strategy that tests the historical performance of stocks to see how they perform if you were to invest in them today. Backtesting a strategy allows traders to make calculated decisions about a stock’s performance. In theory, if a stock’s performance does well in backtesting it might perform well today or in the future. Testing in this way allows investors an opportunity to decide without risking their capital.
Looking at The Market
Even though manual trading is subject to human error and emotion it’s still based on rich knowledge and experience of the market.
There are scores of automatic trading platforms today, many of which make bold claims about the returns available. But there are also real automated trading systems, used by major financial institutions, that can create genuine returns. In reality, it depends on the type of investing you’re doing and how involved you can be.
Top traders will be watching the markets constantly, but if you’re trading to boost your own accounts you might benefit from using an automated system.
What’s consistent is that there are no ‘leave it and wait to see’ investment systems. Even the most basic automated trading platform will require your input at some point if you want to make money. They all stop making money at some point, so as a beginner you’ll need to manage when you stop investing your money.
The answer as to whether automated trading is better or worse than manual trading is like many unhelpful, but realistic answers. Because ‘it depends.
Robots can certainly process information faster than a human and don’t need sleep. But an automated trading platform relies on algorithms and can’t adjust when something unexpected happens to change the nature of the market – an earthquake or a change in country leader, for example.
Automated trading allows traders to back-test their theories too to help reduce the risk. Manual trading is based on the more traditional approach of relying on the trader’s experience and knowledge.
Some traders will blend the two, looking at both quantitative and qualitative elements to create their strategy.