The Top Disadvantages of Automated Trading

The Top Disadvantages of Automated Trading

Automated trading provides a lot of advantages for traders who want faster and more convenient trading systems.   It gives them the chance to remove human errors, to develop quantifiable edges, and to manage trades more efficiently.  But it’s not all good stuff. Automated trading also has disadvantages.

If you are thinking of completely pivoting towards automated trading, you have to consider large drawbacks and Traders Joint Account for them before doing your leap.  

Here are some of the biggest disadvantages that automated trading can give.

Hardware Failure

If you want to make your automated trading system successful, you have to know that several major inputs serve as prerequisites.  

For one, you need uninterrupted electrical access to run the computers that will execute your automated systems.  Computer hardware that is used to operate the automated trading system should be kept in excellent working condition.

Routers, exclusive hard drives, and excellent internet connectivity are all a must.  This is because gaps or lags in electricity or internet, no matter how small, can pose huge problems to the automated system’s performance.

Though exchange-based hardware and internet connectivity issues seldom appear, they are definitely possible.  For instance, natural disasters can shut down servers at the exchange. Power grids can be vulnerable to different interruptions.

Faulty Trading System Development

One of the key characteristics of an automated trading system is the method by which it was developed in created.  Most of the time, there’s a heavy dependency on the results gathered from historical data analysis and backtesting in order to create a statistically quantifiable trading system.  

But even if the ability to test a system’s validity on historical data is a powerful tool, there are still downsides that can make the results of the testing inaccurate or misleading.

Backtestedresults  can be greatly crooked  by confirmation bias, which is the tendency to search for or interpret information in a manner that confirms your initial assumptions.  In many instances, you might unconsciously exclude pertinent data from the study. You may even create a study in a way that it guarantees a successful result, ie favorable to or confirming your initial assumption.

Software Glitches

Automated trading can be very vulnerable to software malfunctions, which are normally called glitches, located on either the client side or at the exchange.  A glitch can be a small error or malfunction that can prohibit an entire operation from running smoothly and faultlessly.

Since it refers to electronic trading, a glitch can be a minor error in the programming of an individual Trading Account Types automated trading system.  It may also be programming error in the order matching software at the exchange.  And even if you think that the glitch is a small diminutive discrepancy, it can cause incredibly huge negative impacts on the system.

Historically, glitches have caused unwanted events, line the 2013 glitch in investment bank Goldman Sachs’ software.  That resulted to a flood of unwarranted trading activity on Goldman’s behalf. The end loss was seen at around hundreds of millions of dollars.

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