Automated systems are full of advantages but there are some disadvantages as well, which all traders need to know:
1. Mechanical Faults
The theory behind the automated system seems very easy – Just Set up the software, make some rules, and seeing it trade. But in reality, this whole automated trading is a very complicated and sophisticated yet unfailing approach. Automated trading took place on the computer depending upon trading platforms which means it’s not happening over the server. So if there’s any internet connection breakage, an order can not be placed. This could lead to variation between system generated trades and actually executed trades.
Although it’s kind of fun, turning on your computer and then leave it for the day, that’s, not the case. You have to monitor an automated trading system. This is mainly because of power failure, system crashes, Internet connectivity issues, etc. It is also possible that automated trading experiencing quirks results in duplicating orders, missing orders, or no orders at all. One can only save himself or herself from facing these by constantly monitoring time to time to quickly identify and rectify.
3. Over Optimisation
Though this limitation is not directly related to the automated trading system but for those who employees the backtesting technique. This is also a sort of human-made complication by creating systems that look way good on paper but perform dreadfully in real-time. Over-optimization means excessive curve-fitting into the system that results in making an inaccurate trading plan. It generally happens traders try to tweak a strategy to achieve max profit or exceptional results on the historical data on which it is tested. All these parameters adjustment to create a perfect plan leads to absolute failure when applied in the real market.
4. Avoid the Scams
Just remember one thing while searching for your preferred automated system: If it sounds too good, it might not be. There’s a lot of scams going on promising to make higher profits at a low price. So, how can we see whether a system is authorized or fake? To prevent these kinds of frauds, here are some tips:
a. Investigate thoroughly by asking questions before paying or laying down any penny for the trading account.
b. Research well and try to gather as much information you can about the system. Briefly go through the norms as well.
c. Check for testimonials over third party websites or financial regulatory websites for reviews.
d. Look out for the trial period for the system. A lot of spamming sites won’t offer you a trial version.
5. Server Based Automation
Traders can automate their trading system through server-based trading platforms. But these platforms come with commercial strategies for sale allowing traders to design their own systems or to host their system on the server. This generally results in faster, smooth, and reliable trading entries.