Every trader should automate their trading strategy. This is especially true for new forex traders given the low barriers to entry in the market and the generous amounts of leverage available. The process of developing an automated trading strategy has numerous ingrained benefits for traders that can help avoid making costly mistakes that are typically associated with the shortening of a trading career.
Reason #1: Development of a Trading Plan
A key to success in trading is to have a good plan and to have the conviction to stick with your plan over time. The basic tenet of a trading plan is to know exactly how you will act throughout the entirety of a trade before you place your initial entry. Often times, traders will bend this definition of a trading plan, allowing for some discretion throughout a trade. This is not beneficial to a trader because this level of discretion means that you cannot reliably backtest your strategy. By automating a trading strategy, the trader is forced to define exactly how each trade will progress. As such, by choosing to automate a strategy, you are more likely to be testing and trading a complete plan.
Reason #2: Backtesting
While it is not necessary to program your trading plan in order to backtest it, there are definite advantages to backtesting an automated strategy. First and foremost, once a strategy is automated, the sheer efficiency of backtesting is indisputable. Whereas manual backtesting may be subject to a sampling bias, as the strategy is likely only tested on a small fraction of recent history, automated strategies can provide a wealth of insight into the validity of the trading hypothesis over an extended period of time, through a range of market conditions. Backtesting over longer periods of time provides a trader with greater market experience as one will experience the broader scope of how the market operates over time as opposed to the limited experience the very recent history has to offer.
Backtesting also provides opportunities for improvement of a trading plan. Given this, the goal of backtesting is not simply to test your hypothesis, but rather to allow for the organic growth of a trading strategy. With the efficiency of testing, it is possible to isolate individual filters and determine if they offer any improvement to the profitability of the strategy. If they do not, it is best to leave them out in their entirety as they may simply negate the benefits of another filter.
In addition to this, there are also psychological benefits to the backtesting of a strategy. Knowing the past performance of a strategy allows traders to be better equipped for live trading of their strategy as they will better undertand the probabilities of wins, losses, and the long-term potential of their strategy.
Reason #3: Objectivity
Another major benefit of automated trading is that decisions are made objectively according to a predefined set of rules. Whereas a trader may attempt to anticipate trading signals, effectively seeing the market the way he/she wants to see it, an automated strategy is only concerned with the reality of the market.
Reason #4: Avoiding the Pitfalls of Being Human
Often times in trading, a contributing factor to success is not mastering the entries or exits from trades, but mastering your emotions in the markets. There are numerous disadvantages to the human condition in the markets. Humans have the tendency to get emotional and to make decisions on this basis; trading robots do not. Humans have a basic need for sleep, and tend to make poor decisions when this is deprived; trading robots do not. Most humans relate their activity to the rewards they receive, due to the nature of other lines of work. This often results in the perceived notion that one should always be trading. This can drive a trader to bend their rules for entering trades, in order to allow for more activity in the markets. A trading robot, on the other hand, is always trading but only under the pre-defined circumstances as defined by the trading plan.
Reason #5: Freedom
Most traders cite freedom, typically financial freedom, as a goal of their market activities. It is in search of this, that many traders often become less free, becoming a slave to their trading. By approaching this task with the goal of being separate from your trading, by means of automation, you can then protect your lifestyle. In this regard, when financial freedom becomes a reality, you will have the time and resources available to best take advantage of this.
Trade profitably and automatically, my friends.