The Limitations of Automated Trading : What Algorithmic Trading Will and Will NOT Do For You

We are all familiarized with the over-hyped internet marketing fever that has grown around the world of automated trading, a phenomena that has become very strong since  the  capital entry barriers were greatly lowered giving the ability to trade this way  to people with modest income levels. This has created a great problem – in which most retail traders simply fail with automated trading – mainly due to the very large number of misconceptions and disinformation created by marketers with the goal of selling products without any regard for the long term success or viability of their products. What they don’t realize is that they are not only creating a lot of financial loss through account trading losses but also making sure that most people will never succeed as most of the things they learn are very wrong and a lethal approach to this form of trading.

Within this post I want to share with you some of the most basic aspects of automated trading, particularly regarding what it can and cannot do for you. Most people enter the world of automated trading believing that this is something it is not (an ATM) which in time makes them take a lot of financial loss and frustration as what they see on marketing and what they “want to be true” does not resemble what reality has to offer. So what can automated trading in fact do for you and what does it simply cannot achieve ? Keep reading the next few paragraphs to find out !

Let us start with the blunt truths about the things which automated trading simply will not be able to achieve for you. Automated trading will NOT achieve you hands-free, stress-free income without moving a finger and it will not involve any less work and studying than manual trading. Automated trading is – to say the least – harder than manual trading in the sense that you need to acquire a whole lot of additional knowledge – besides knowledge related to trading – tt be successful (such as programming, statistics, mathematics, etc). Many of you may think that this is simply “not true” as someone else can simply program you a “profitable system” but the truth is that all system eventually fail and all systems need to be continuously monitored to see if they fail their long term statistical characteristics. If you simply lack the knowledge to develop new systems and adequately know how to monitor the performance of your strategies (like for example carrying out Monte Carlo simulations) then you are probably doomed to fail.

Certainly automated trading will NOT save you from learning how to trade, it is vital for anyone trading a system to know exactly how it works, exactly how reliable its simulations are and exactly what its worst case thresholds are. Failing to understand the market and trading “black boxes” will only lead you to try many different systems you “believe can work” only to find out that they crash your account despite their beautiful -yet very unreliable- simulations. Automated trading is – in every sense – a long path, and it will NOT allow you to “cut corners” in trading. If you are into algorithmic trading because it’s “easy” then you need to think about this more in depth.

Perhaps the biggest problem with inexperienced retail traders and algorithmic trading is the fact that just because execution is relegated to a computer it gives it the illusion of being a quick path to profitable trading but – quite oppositely – automated trading can be a quick path to ruin in a much faster and less productive way than manual trading would since most people lose their money to commercial EA black boxes from which they can learn little or nothing as they have no access to the code and to what actually happened while losing money with a manual account at least gives the user some very valuable experience regarding trading difficulty and psychology.

Another extremely common thing that people think automated trading will do – which it does NOT – is remove emotion from trading. You would think that having an “emotionless” computer executing trades would make your trading rock solid but the truth is that YOU are the one who allows that system to trade. Your emotions will affect you just as badly when you trade in an automated fashion since a 20% draw down is – after all – a 20% draw down. Inexperienced traders – who are not emotionally intelligent – will quickly remove a “losing system” from their accounts and increase risk when a system shows profits (or even before just to have more potential profit), however the truth is that emotions remain there and success in automated trading is as dependent on emotional intelligence as manual trading is.

However you should not think that just because automated trading is hard it is “not worth doing”. There are many things that automated trading CAN do for you which would be very hard or almost impossible when trading manually. For example I currently trade/manage more than 80 live accounts and it would certainly be impossible to execute the almost 40 different trading system instances I have running on them 24/7 if I did this by hand. Automated trading allows you to increase the number of strategies you trade and reduce your need to stay “glued to the screen” under hours in which you have to sleep. For example some of my strategies trade the European open (at about 2-3 AM my time) so for me trading this in manual way would be disastrous (as I need to sleep!).

Automated trading also allows you to know in a much better way what you are trading. Trading strategies which are designed with RELIABLE testing in mind can give you accurate simulations of what the past would have been like allowing you to see the ability of your strategy to tackle past market conditions. Simulations also allow you to perform stress tests (like those described on a post I wrote this week) which allow you to see how robust your trading strategy is against things like out-of-sample tests and spread variations.

Algorithmic trading allows you to have a much more diversified trading profile, to spend your hours doing system development and analysis instead of trading – which frees you from having to stay away late at night – and to increase your account management capabilities beyond anything you could do from a manual point of view. So yes, automated trading has many positive things, allowing you to quickly evaluate/discard system ideas, to measure your system’s historical edges and to even develop system in an almost automatic fashion (like what Coatl does).

So long story short, automated trading is a way of trading with many advantages  and the possibility to expand your trading possibilities beyond your wildest dreams but it requires very hard work and an in-depth understanding of computers, trading and statistics. Automated trading is NOT an ATM and its not a short-cut to profitable trading, it is just a way of trading which requires time, effort and understanding, the main reason why you do not see a lot of people living from algorithmic trading and certainly no one living from black box commercial systems.

If you would like to learn more about my work in automated trading and how you too can build your own likely long term profitable systems based on sound trading tactics please consider joining, a website filled with educational videos, trading systems, development and a sound, honest and transparent approach towards automated trading in general . I hope you enjoyed this article ! :o)

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3 Responses to “The Limitations of Automated Trading : What Algorithmic Trading Will and Will NOT Do For You”

  1. Daniel-

    Great article though most of your readers are well beyond the newbie stage due to your excellent efforts to educate us all.

    I think the best thing about automated trading is that it frees your time and energy for higher-value activities. The growth of your business and the Asirikuy community is a case in point. There was a time last week when the entire net value of the assets being managed by your systems grew by many, many thousands of dollars. And during that time you were blogging, researching, sleeping and dreaming up new stuff. The value was created because the work was already done.

    Glad you are working for us and not the big banks!

    Cheers and thanks,


    • admin says:

      Hi Chris,

      Thank you for your comment :o) I certainly agree with you in that my frequent readers – such as yourself – might have already learned a lot about forex trading and are most likely way beyond the “newbie” stage on forex trading. If we put it in my animal kingdom classification of traders I would say that most readers are ferrets or dogs while only a small amount are rabbits or hamsters. However through the keywords people use to find my website I can tell that a group of readers is still very much within this beginner stage and I like to publish posts like this to help them get a “reality check” regarding their expectations :o)

      Truth be told I had never sat down to think about that wonderful fact you have mentioned. The work I made more than a year ago with the development of some systems generated a lot of money last week and this was effectively being done while I was doing other stuff. Definitely this means that you can eventually get to the point where automated trading generates money “while you sleep” but this doesn’t mean that you didn’t have to work or that work doesn’t need to be done in the future. As you say, it frees your time and allows you to better distribute your work load across whichever hours you choose. As you so cleverly put it, the value was created because the work was already done, but work needs to be done to ensure future value :o)

      I am also glad I am working for the “little guy” and not for the “big players” !

      Thank you for your comment and for being a very faithful reader,

      Best Regards,


  2. Parag Mahajan says:

    I think Automated systems would better suit for Scalpers with huge Vols as it involves high transaction costs, brkgs. As a Retail Trader, I think strong money management along with Tested System based on simple rules is good idea. It allows you to stay longer in market & minimize losses.

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