02:35 PM, 24 Feb 2017 (AUS EST)   The market is currently open       

What is a Trading Robot? Should I Use One to Trade?

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Does the phrase ‘trading robot’ conjure up images of a humanoid machine yelling out buy and sell orders making the owner filthy rich? It seems quite exciting that we could purchase an automated machine to trade and make money in shares. As computers are able to make billions of mathematical computations per second, shouldn’t a trading robot be the epitome of stock market investing? Just visualise the market of the future being nothing more than a warehouse full of metal and fiber optics.

What is the truth behind what drives a trading robot? And should we buy one?

What is a Trading Robot?

You may be disappointed that instead of being shipped a giant robot, you will probably just download a software program that will give buy and sell suggestions. What drives of such a system?

Machines and their operating software are invented by people. So too, the software is also designed by a technical analyst. For a very long time such analysts such as J. Welles Wilder and John Murphy have used price charts, volume bars, along with various technical derivative indicators to give buy and sell signals. Most people have heard of:

All you need for a trading robot is a well defined set of rules to follow. Next, simply plug these into a program that will scan and screen the results for you. For instance, you could have a simple system that buys as the price of a certain stock moves above 10 dollars and sells when either 5 or 20 dollars is reached. You either double your investment or lose half. This very simple system could be programmed into software for a simple buy and sell recommendation. Most programs are more sophisticated than this.

Dangers of Trading Robots

With the lightning quick reflexes and almost limitless ability to scan the market for opportunities in real-time, why should be exercise caution when using trading robots?

Remember that the robot is a set of rules entered in by the creator. The success of the robot is not the speed in which the transaction is made, but the expertise and reliability of the trading rules that the person programmed in. Are the indicators reliable? What is the success rate? Does it work equally well in penny stocks and ones valued at many dollars per share? Does it screen for liquidity? Does it differentiate between bull markets and bear cycles? What about trending stocks in a channel versus ones trading sideways?

The point here is that you often have no idea about what is driving your trading robot. It may be a rigid set of rules that works well only in limited markets. If you cannot see what drives it, you cannot fix it, or even know on what road conditions you should use it.

If the trading robot allows you to modify the settings then this is better than having a black box full of unknowns. Still, the robot will only do what you tell it to do. You will need to be a good trader looking for a little assistance with automation, not a bad trader looking for a computerised mechanism that will print money and put it into your account.

How can you essentially trade the same as a robot?

Being a Trading Robot

To trade like a robot you first need to remove emotion out of the equation. An average system can make you money if traded with discipline; and great system that is overturned by emotional trading will most surely lose you money. So our first lesson is to be emotionless like a robot.

Next we need a trading universe. Which sort of investments will you trade? Shares, managed funds, CFD’s, FOREX, options? Then you will need to narrow these down to the appropriate exchange, and particular companies or contracts you wish to trade.

Create your rules. This will include how much capital to trade for each transaction. Consider the 2 percent rule as one method. You will need to define entry and exit rules. Both profit and stop loss orders need to be considered.

  • As an example: I want to trade stock options. I am trading bank blue chip shares. When the ADX turns up on both the market and the individual stock I purchase at-the-money Call options. I sell at a 50 percent profit or at a 50 percent loss.

This may not be a great system and by no means should you copy it. This is just to illustrate a very simple system that I can now follow and possibly use automated software to help me with.

Should I Use a Trading Robot?

For most people the answer is no. Why? Because you should only use a robot if you understand the market well and are merely using the robot as a tool. The robot should reflect your trading style, management, risk, and individuality. Most automated system are more often designed to make the creator money through sales, but he is the only one profiting. Robots are generally not adaptable and will rigidly follow the rules you give it.

That being said, if you have a defined set of rules that you exclusively use 100 percent of the time and you need assistance in finding the setups and the discipline to trade them, then perhaps this machine powered automation device will be just the thing you need to get your trading back on track.