This week, we take a deep and philosophical look at automated trading and why it's so important for investors to adapt and transition to automation. We'll dig into how human decision-making evolves and why it can be limited when it comes to complex financial markets and investment decisions.
We'll also explore cognitive investor biases and how they affect manual trading. Plus, we'll talk about the new technology that's driving this shift, how to manage risks in autotrading, and what future trends and challenges we should expect going forward. This exciting perspective on the future of investing will show you why autotrading is set to take over.
The Concept of Investing
- Investing is a calculated risk based on known variables and involves holding that risk until reaching an expected future outcome.
- Risk can be defined as the space between today’s investment and tomorrow’s return.
- Calculating and managing risk effectively is where most investors fail.
- Autotrading provides the opportunity to cut human-caused errors from the process.
- Using quantitative approaches to investing, such as autotrading, will eventually dominate the market.
- Many of the top investment firms have adopted an automated trading approach.
The Collapse of Latency and the Explosion of Choice
- The time between attaining information, and that information being used to price the market is almost non-existent.
- Low latency has resulted in markets becoming incredibly dynamic and volatile.
- Markets are expected to become less stable over time, requiring persistent scrutiny.
- Automated trading allows continuous monitoring of investments and collection of data.
- Increasing market diversity has resulted in an array of options for investors.
- More choices allow rapid movement of investments to new and different markets.
- This creates more volatility in the market, and new methods are needed so that you stay ahead of the market.
Agility is Vital
- Being able to make quick investment decisions based on reliable data is vital to being a successful investor.
- Therefore, if autotrading is not part of your portfolio, you will get left behind.
- Investment agility is comprised of the flexibility of your portfolio and the ability to change investments at any moment.
The New Generation of Autotrading
- Everyone can benefit from cooperation and collaboration and it doesn’t have to be a revolutionary thing that happens overnight.
- You cannot stop automated trading. It is improving and adoption rates are increasing; soon you will be “forced” to adopt it.
- Manual trading will eventually become impractical and too expensive to implement.
- Autotrading is becoming the “next frontier” and those who are at the forefront as trading pioneers are going to get rewarded.
Evolutionary Background & Cognitive Limitations
- Human growth and evolution rely on better decisions, which stem from increased information. As data expands, we thrive.
- Our brains have limitations and often make compromises, unable to recall or remember events or situations perfectly. Achieving flawless recollection is impossible.
- The requirement for constant and flawless decision-making clashes with the intricacies of financial markets.
- Cognitive biases hinder effective decision-making in manual trading.
- Common cognitive biases include confirmation bias, loss aversion, and endowment effect.
- Overall, technology and data have outpaced our capacity and this is a key factor contributing to the widening gap between those who succeed in markets and those who do not.
Automation & Objective Decision-Making
- Autotrading systems are designed to mitigate cognitive biases and emotions.
- Automated doesn't imply unattended - humans still play a crucial role in strategy development.
- Autotrading provides the ability to execute trades at high speeds and analyze vast amounts of data faster.
- Increased agility means objective, data-driven decisions devoid of human biases.
- Automated systems excel at exploiting market inefficiencies more effectively than manual traders. The "greatest" traders and investors initially outperformed others by exhibiting superior self-control and emotional intelligence.
- Therefore, autotrading contributes to market liquidity and enhances overall market efficiency.
Automated Trading Technology Advancements
- Technological advancements have facilitated increased accessibility and efficiency in autotrading.
- The profound impact of artificial intelligence, machine learning, and big data on autotrading strategies will cause wider adoption.
- Technological advancements have lowered entry barriers and democratized autotrading.
- Leverage technological advancements to take advantage of market inefficiencies.
Autotrading Concerns & Risk Management
- Common concerns regarding autotrading systems revolve around their perceived lack of control, autonomous decision-making, and operation within a mysterious "black box" hidden from view.
- Autotrading algorithms incorporate risk management protocols that aid in safeguarding investors.
- Automated trading has the potential to minimize human errors and emotional trading decisions, leading to better outcomes and more wealth.
- As autotrading technology evolves, there is a magnification effect that amplifies the impact of trading strategies, whether they are good or bad.
- Automation doesn't "fix" trading strategies but rather enhances their effectiveness.
Autotrading Trends & Challenges
- Emerging trends in autotrading include the integration of social media, sentiment analysis, and natural language processing.
- The availability of 24/7 markets for trading will become a reality as autotrading takes over.
- Challenges lie in the centralization of information and data from different sources.
- Stay up-to-date on emerging trends, technology, and markets to ensure you do not get left behind.
Autotrading is the next step in the evolution of leveraging technologies to manage risk and execute trades. The “chasm of risk” is where human psychology falls short and autotrading will dominate with objective, data-driven decision making.
Now is the perfect time to begin your exploration of automated trading. Don't be afraid to become a trading pioneer; soon, everyone will be using automation to manage their trades and investments. The earlier you adapt, the more you'll set yourself up for long-term success.