Thursday, March 19, 2015

Does an Automatic Stock Trading System Help Your Trading?

Like many stock traders I too had a day job to take care of. I could take some time out of my busy life for trading stocks, at least in the evenings. In the beginning days as a stock trader I used to think that an automatic trading software would have done more help. It took me a lot of successful trades and failures to learn trading lessons and realize why trading software may not help my trading.




My Desire for Automatic Stock Trading
I started trading stocks like many other traders. I got fascinated by the smartness it takes to trade and also the compounding effect that multiplies our wealth with each trade. Stock trading just offered the right way and simplest way to the riches. But I had to face lot of obstacles on the path.
First of all the stock trading was not as simple as it initially appeared. The buy low and sell high as you might think of, for trading, does not seem to have any value at all. With few successful trades in the beginning I had realized that I have become a good trader who trades in an organized fashion. I had also followed certain rules and thought that they will be foolproof.

The initial success made me realize that I need to spend more time on this to make the fullest benefits from the stock market everyday. I never did day trading at that time but felt that it would involve same principles but on a daily basis. Trading during the full time the market is open appeared to open up opportunity for more earnings.
I started thinking about putting my rules together and creating a software out of it. I used to get emails from different people who try to sell their softwares of trading systems. But I did not want to waste money as the cost was always higher. I was still in my early days of trading where my capital itself was not enough to impact my day to day life. I was still learning with whatever capital I am trading with.
I thought of writing a script in any programming language to do trading automatically observing the movement of a stock during the day when the market is open. Even at that time I knew very well that a single stock is enough to focus and make good money with trading. But the difficulties associated with different aspects of linking the program with internet and adding features to wait, hold etc. stopped me from going further.
The Differences Between a Human Trader and a Robot Trader
I later felt glad for not doing such a thing. There were lot more lessons to learn from trading. With more losses coming in my way, I realized automatic trading would have gone broke very quickly. The reason was there were three important qualities needed for successful trading that are possible only from a human trader but not a robot trader.
The Learning Curve
The most important of all is the ability to learn constantly all of the life time and adapt to the market behavior. A human being's learning curve never stops. They always learn some lessons throughout their life. But a software trader has fixed rules and can't adapt with the ways the markets make their changes.
Ability to Sense the Situation
There is also something of a kind of sense that a human trader develops to assess the current situation and take appropriate decision. But the robot has only one choice. It has to do what the rule tells. That is always predictable and can even be cheated by a different trader who could guess that you are using a software for trading. This is like a trap that can be made easily on a stock because you are anyway going to trade only a single stock. The repetitive rule based behavior may prompt the intelligent traders on the other side to play a trick to make you fall.
There are many instances in which I had taken decisions not based on the outcomes of applying principles, but straight from the mind that comes automatically. It is the complex processing ability of our brain and coupled with our subconscious thinking that results in completely unexplainable thoughts and ideas for a human being. When trading stocks this helps enter or exit some stocks just at the right time. Although we might think that it is all due to luck, it is not really so. This is because we tend to repeat it again as our subconscious mind builds habits out of our consistent actions and thoughts.
Courage to Weigh Bets Dynamically
Another important thing that a trader should have is the courage to bet big for a potentially profitable trade and a controlling sense to bet small for a testing trade. We do not always have to trade a fixed amount of our capital. It makes a big difference with time by allocating different weightage for different trades that go right and wrong. If your bets were heavy on right trades and light on failed trades, can't you see how strong your portfolio will be?
A human being can assess the situation with fundamental principles and gut feeling to determine how much capital can be placed in a trade right now. A trade does not always have to be just buy now and sell later. It can involve multiple transactions. You can buy for a test to feel the rhythm of the stock because sometimes we don't feel a stock's movement unless we have some money in it. This is where a robot trader becomes dumber compared to a human trader.
Eliminate the Need for an Automatic Stock Trading Software
These are the things that differentiate a blind rule based trading and a disciplined adaptable trading. Our human nature is very much helpful all through our trading life. A robot though can do repetitive tasks simply cannot fill our place as a trader. Use softwares for other useful tasks such as getting the list of stocks based on a metric say concurrent gainer over last 5 days etc.
You should put enough time to discriminate the data, assess the situation before making a transaction. If you think it is not possible think again. We can always make time from our life but only for those things that we feel important. You could be wasting time on less priority things but if you find out how important they are compared to your trading, you will make the time. This will then eliminate the need for lazy automatic trading!
Stock trading is like any other discipline. It requires skill, effort and intelligence on the part of the stock trader. The long term success of a stock trader is determined by his/her ability to make consistently right bets. Learn all the qualities you need to develop and the strategies to trade well consistently at Next Good Bets.


Other related articles:
Your Loss Does Not Necessarily Mean Somebody's Gain
Averaging the Buy Price to Minimize Risk: A Common Mistake of Stock Traders