One of the most attractive things about quantitative trading approaches is that many of them have the capability to be completely automated. That leads many traders to believe that they will be able to simply program a strategy into their platform and turn their computer into a virtual ATM.
As with most things in life, automated trading isn’t as simple as it appears. The performance of different strategies changes over time as markets adjust. Continually evolving technology exposes our strategies to continually evolving biases. The fact that a strategy worked well last year is no guarantee that it will work well this year.
With all of the different ways that markets could fundamentally change, do you really feel comfortable designing a fully automated strategy?
An article that appeared on Forex Crunch earlier this month discussed the pros and cons of automated and manual trading. After breaking down both sides, the article concluded that the best approach is usually to develop a strategy that lies somewhere between the two extremes.
The fact that you want to build a fairly automated strategy does not have to mean that you can’t override that strategy if markets suddenly change. On the other hand, the discretionary approach you are working on might be improved with an expert advisor to help you identify setups.
Advantages of Automated Trading
The biggest advantage of using an automated trading approach is the reduction in slippage through flawless execution. If your strategy doesn’t have to wait for you to confirm an entry, it can jump into a position the instant that it sees a signal. This improvement in order entry also allows a trader to avoid being glued to a computer screen all day.
Some of the other advantages of automated trading that the article covered include the ability to process large amounts of data and the ability to trade around-the-clock. The article points out that automated strategies can monitor far more markets than humans can, and automated strategies never have to sleep.
Advantages of Manual Trading
The biggest advantage of manual trading, according to the article, is having the ability to call and audible. The article suggests that if a crash in Japanese Yen is due to a large typhoon, a manual trader can simply shut down his strategy until the weather clears up.
Another advantage that manual traders have is the ability to scale the aggressiveness of their strategy up or down depending on gut feelings or discretionary judgements. This may not be helpful if your gut feelings are not very accurate, but traders with extensive experience will be much more comfortable trusting their instincts.
As you can see, there are advantages to both sides of this discussion. The best approach for any trader is to find an approach that works well with their own personality.