Automated Trading Software (EAs) – Should You Trade With Robots?

Last Updated on September 8, 2023

Trading is among the industries that have been disrupted the most by technological development. The progress for the last twenty years is staggering. It ranges from the introduction of electronic communication networks (ECNs), through smart order routing, to automated trading software. Thanks to trading robots, today, buying and selling assets is entirely automated, much more affordable, and, most importantly – flexible. Does this mean we have solved financial markets once and for all? The short answer is no – automated trading isn’t flawless. Let’s expand on this and find out is trading with robots a good idea?

Table of Contents:

• What Is Automated Trading Software?
• How Does Automated Trading Software Work?
• What Does Automatic Trading Software Do?
• Risks Associated With Robot Trading
• Pros And Cons Of Automated Trading With Robots
• Should You Consider Using Automatic Trading Software (EAs)?
• F.A.Q.

What Is Automated Trading Software?

An automated trading software or trading robot is a programmed trading system that allows automated buying and selling of assets upon pre-defined rules. Or, in other words – a programmed clone of the trader. Some people also call them “Expert Advisors” or EAs.

But why are Expert Advisors (EAs) so popular? To find out, let’s start from traders’ priorities. 

A successful traders’ most valuable quality is discipline and self-control. This means they have a strict plan and a set of rules (strategy) they adhere to.

On the other hand, a traders’ most precious asset is time. It is finite, and if they find a way to make the most out of it, they will significantly improve their efficiency. 

Trading robots do just that. They are pre-programmed to follow a set of rules (the trader’s preferred strategy) and can trade tirelessly – 24/7/365. 

An automated trading software functions as an extension of the principles of algorithmic trading. The intent was to maximize traders’ capacity and expand their horizons to trade different assets on a set of markets simultaneously.

The concept of EAs, in their current form, was first proposed in 1949 by Richard Donchian and was further developed by John Henry in the 1980s. In the 1990s, tech-savvy traders started experimenting with automated algorithmic trading systems for propriety usage. Next, automated trading software made their way through brokerage companies and asset managers. At these companies they became popular as a way of automating the clients’ asset management services. The first publicly-available robo-trading solution was launched by Betterment in 2008. 

What is an Automated Trading Software - Should You Trade With Robots?

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How Does Automated Trading Software Work?

Automated trading software systems run advanced mathematical models to make high-speed trading decisions and transactions.

EAs are designed to replicate the way traditional trading methodologies work. You have a strategy that contains a set of rules, including what, when, and when not to buy/sell, where to trade, what level of risk is appropriate, and more. Basically, EAs include everything you base your trading strategy on.

The set of rules (or the strategy) is then programmed to trade automatically when the predefined conditions are met. Think of EAs as the tireless, more powerful digital version of you as a trader. 

The automated trading software can be linked directly to a broker account or coded right in the particular platform’s proprietary programming language (EasyLanguage for the TradeStation platform, NinjaScript for the NinjaTrader platform, MetaQuotes Language for MetaTrader, and others).

Aside from the coding skills, to build an automated trading software, one should be aware of all disciplines successful traders are usually experts in, including technical analysis, mathematical modeling, statistics, and more.

That is why building an EA is a costly and complicated process. The most prominent players in the industry usually hire seasoned programmers with advanced skills in C++, Java, Python, and other languages to build their proprietary trading systems from scratch. This process costs millions of dollars and is usually handled only by the biggest companies. These include investment banks like Goldman Sachs and JP Morgan, high-frequency trading firms like Virtu, Jump Trading, and Optiver, and more.

The majority of the brokers also invest in automated trading systems to grant their clients access to high-end sophisticated trading assistants and optimize their order flows and trading process.

Some individuals or retail traders also take advantage of trading robots, built by themselves or available on public libraries.

What Does Automated Trading Software Do?

An automated trading software basically does the same as the regular trader, but in a more efficient, robust, and fast way. Why is that? The automated system takes emotions out of the equation and trades only on pre-defined rules. The only strategy here, once again, is to buy low and sell high.

Or in other words – the software tries to take advantage of instruments that are under- or overvalued for a particular reason, be it a fundamental one or a market inefficiency and mispricing. 

To determine which instruments are worth trading, the system takes a wide variety of factors into account. Depending on the strategy and the traders’ risk, the EAs can take into account everything from fundamental factors, news, and social media buzz, to technical analysis indicators, liquidity, volatility, and numerous other factors.

AI-powered EAs can continue making trades forever. They stop only when they meet their predefined instructions like a specific profit goal, a trading limit, or else. 

“If we die, it would keep on trading.”
– Ben Goertzel, Aidyia

Although so far it may sound like EAs are the key to solving financial markets, the truth is, however, they have plenty of drawbacks. The list ranges from high costs, through their complexity, to the unpredictable and often overrated efficiency. However, we will get back to that in a minute.

What Portion Of The Market Is Automated?

For now let’s turn our focus to the progress of automated trading software. Ever since the beginning of the new century, it has been steadily developing and conquering the market. It transformed both how we trade and the way exchanges operate. Today, the industry dominates global financial markets. According to reports by JP Morgan in 2017, only 10% of trading is conventional stock picking. The rest is automated. 

According to another report, the global algo trading market is expected to grow with a compound annual growth rate of 3.5% between 2020 and 2025. Orbis Research, the authors of the study, also anticipate a similar steady growth in the trading software market. Meanwhile BusinessWire suggests even more staggering figures. They estimate a compound annual growth rate of 10.6% for the 2018 to 2026 time period.

What all this comes to show is that our markets are now dominated by automated trading systems, which account for anywhere between 70% and 85% of all trading activity.

Risks Associated With Robot Trading

Now, let’s take off the rose-tinted glasses and look at robo-trading assistants from another perspective. 

Although EAs bring plenty of positives, they shouldn’t be considered the answer to everything and the Holy Grail of trading. In fact, EAs possess significant risks for those who are just starting or aren’t aware of the technical side of things.

Scams

While you are looking for the best automated trading system for your needs, you will end up finding out dozens of solutions that offer extraordinary returns for a low price. In most cases, these turn out to be scams, intended to run away with your money.

Bear in mind that the costs to design a good trading system are very high. Just think of the decades of collective experience a team behind one needs. In most cases it needs to include statisticians, mathematicians, traders, programmers, risk analysts, and more. Now think about the know-how and hours of work invested in the design of the system. Would these guys offer it at a low price?

Simply no. Automated trading systems are expensive by design. They are both an intellectual property and a sophisticated system built to make money. It won’t come cheap.

To better understand this – think about what the most successful trading companies have in common. The answer – they are secretive and intentionally keep their algorithms for propriety usage. That is what shapes their competitive advantage. 

To make sure you are using a well-designed, credible, and tested trading system, dive deep in its T&Cs, request technical information, and learn every detail about how it is designed to work. Also, look for feedback from credible sources. Don’t just believe random guys on Reddit or testimonials that look shady from miles. 

Bear in mind that credible solutions usually have free trial periods. Make sure to design a strategy first and then activate the trial to see how it is applied and executed. If everything works fine and there are no red flags, go on to convert the trial period into a paid plan or purchase a license.

False expectations

Don’t expect an automated trading system to be the shortcut to becoming a millionaire. In the end, it can only be as good as the parameters it is instructed to take into account and the rules you want it to follow. So, if your performance struggles, don’t quit, just improve your strategy.

Of course, you are not the only one to blame for having the wrong expectations. Some service providers often market their trading robots by promising success in the range of 80 to 90 percent of the time. 

Bear in mind that, if at all true, this is based on past performance. Market dynamics change, and history often proves to not be so relevant for future price changes. So, don’t forget that there is always the risk that your strategy doesn’t live up to expectations of spectacular efficiency as promised.

In the end, it is worth noting that even the best AI-powered trading systems, employed by the world’s leading hedge funds and trading firms still aren’t flawless. No matter how far technology has come, it still isn’t capable of overcoming the complexity of financial markets.

Speed

Profit opportunities in today’s markets are short-lived. This means you should be at the front of the line if you want to capitalize on them. To do that, you need a well-designed trading system and a quick connection. In other words – a high-speed system.

The most affordable way to do that is to use the services of companies offering server-based trading automation solutions with infrastructure based close to the exchanges you are willing to trade on. That way, you will take advantage of a faster and more reliable order execution.

This will help you avoid problems like slippage or the time discrepancy that often bothers traders and prevents them from realizing the profits they planned for. Slippage indicates the difference between the moment the trading system marks the entry and exit points and the actual moment when the trader entered and exited. You can describe it as the discrepancy between the expected price and the real price at which the trade was executed.

To get a sense of why speed is so crucial to traders nowadays, just consider the millions of dollars high-frequency traders pay annually to get collocation rights and shorten their order execution time by a small fraction of a second. To be more specific – in this game, each millisecond counts.

Although no publicly-available system is a match for the high-speed traders’ infrastructure, you can always do better than simply relying on your home’s WiFi.

Automation’s complexity

Automated trading software may sound like something that eases the trading process. You may think it’s the thing to go with even if you are a beginner, but in reality, the case is a bit different.

First of all, think about whether you really need an EA. Consider its pros and cons.Bear in mind that, although it saves you the effort of manual trading, in the end, it follows the same strategy. Besides, if input directly into the brokers’ terminal, it may require some coding. If you lack the skills, you would have to pay a programmer to set your strategy in place, as well as for continuous maintenance if you make changes on-the-go. 

Every scenario, be it subscribing to a paid solution or building one from scratch will cost you some money. Consider this when deciding whether to go with an EA.

Aside from that, in case you are just starting, it is always better to deal with some manual trading beforehand. That way, you will get first-hand experience and become familiar with the way financial markets work. You will know all the mechanics and figure out the things to look for and adopt when designing your EA.

In the end, it is essential to realize that the success of a trader depends on his strategy, not how fast it is applied. The conventional automated trading systems follow your orders, so make sure to sort them out before anything else.

Pros and Cons of Automated Trading with Robots

Although it may sound like it, automated trading systems and EAs don’t only come with advantages. In fact, they have equally-important drawbacks that one should bear in mind when considering whether to go with automated or manual trading. Here are the most important ones:

Pros

Takes emotions out of the picture

It is no surprise that one of the critical challenges beginners and even some intermediate traders face is preserving their self-control and discipline. As we have stated several times already, the best traders stand out from the rest thanks to their determination to stick to their plans no matter what happens. 

The benefit of the robot trader is that it won’t make irrational decisions after a few unsuccessful trades. Instead, it will continue sticking to the rules its logic is based on, thus preventing bending over pressure, greed, fear, FOMO, and other factors spread among human traders.

Improved speed

Automated trading is much quicker in terms of order execution when compared to manual trading. The reason is that the computer can respond to a particular signal in less than a second, while it is physically impossible for a human trader to keep up with that pace. 

Besides, open positions are usually followed by stop-loss or other orders, which also take time to be set-up, in case everything is handled manually. This lag often translates to lost profit. The quicker you get into a trade, the better terms you will guarantee for yourself.

Allows the application of more complex trading strategies

A good trading system allows you to include multiple parameters and data sources when building your trading strategy. You can construct a multi-dimensional strategy that takes into account market sentiment indicators, technical signals, social media factors, fundamentals (P/E ratios, earnings, etc.), trading volume, asset-specific information, and many more, and apply it instantaneously. 

If you try doing this when trading manually, it will take you a lot of time. You might also miss a high-potential opportunity.

More powerful

We have already discussed how hard day trading (opening and closing several positions per trading session) is. Now, consider that day traders usually find it challenging to trade at a few markets or a few assets simultaneously.

On the other hand, the robot trader can help you create and exploit arbitrage opportunities. This means you get a much-improved efficiency. Aside from that, human traders are often prone to missing a trading opportunity, while EAs capture everything.

Cons

Technical risk

Although computers are much more reliable than human traders, we should note that they also bear some risks. Most of them are related to cases where the system runs locally and range from power shortages and technical glitches to loss of internet connection. Make sure to bear in mind these stumbling blocks when considering EAs. In the end, you don’t want to be stuck in the middle of a trade due to a tech problem, right?

Far from flawless

Many people think an EA can make them the hottest trader on the block. The truth is that automated trading systems are as good as the strategy they are authorized to execute. The AI-powered trading robots sometimes struggle to beat benchmarks and even their human counterparts. 

An interesting study on the topic concludes that robo-advisors prove to be a valuable, alternative information intermediary to traditional sell-side analysts. What this means is that robots don’t replace the need for humans. They just complement us.

You should still keep an eye on them

Although automated, robots shouldn’t be left without monitoring. Connectivity issues, technical problems, systemic glitches – these and many other rare, but still valid concerns may interrupt the EA’s activity, thus losing you money. Aside from that, you should also consider market and trading anomalies taking place. These will require you to intervene and adjust the system. 

And, oh, let’s not forget that a robo-trader exacerbated the Flash Crash in 2010, while a trading glitch cost Knight Capital $440 million.

Can prove expensive

Building or renting an automated trading system might be a significant investment. Make sure to run a few scenarios about the optimal profit goals and risk exposure you should seek to make it economically viable and cover these costs. 

Also consider the frequency you plan to trade with. If you intend to make just a few trades per day, maybe manual trading is the better way to go. If, on the other hand, you plan on trading constantly (dozens of trades per day), then EAs can prove helpful. 

For the most part this point applies mainly to retail traders. Prop trading firms, big investment banks or asset managers using automated trading systems benefit from economies of scale which reduces their costs significantly.

Should You Consider Using Automated Trading Software (EAs)?

The short answer is – yes, definitely. Consider it at least to get familiar with the concept and to find out whether it can help you in your trading activity. However, don’t jump on the bandwagon just because it’s new and trendy. EAs might be a shiny new toy for a retail trader, but it doesn’t work out well for everyone.

Whether your trade is executed with a simple click or automatically, it doesn’t matter at all. What matters is how efficient your strategy is. If you think it works well and you need to scale it, then consider using an EA. 

Also, make sure to go with an automated trading software only if you can afford a good and time-tested one. Go through the detailed documentation. Find the level of support that comes with it as well. That includes the regularity of updates, and every bit of technical information relevant to you. Avoid black-box software.

Don’t go with an EA if you can’t monitor it regularly. The most successful traders watch their trading assistant in action, make regular adjustments, and intervene when needed. In Jack Schwager’s book “Market Wizards: Interviews with Top Traders” we find out that the most successful traders engage actively with their trading systems. They  don’t just sit back and eat popcorn.

In the end, it is your call. However, it is safe to say that after you’ve read everything in this guide, you probably already know the answer.

F.A.Qs