AI is all the rage right now. Most of the talk lately has centered on things like writing, images, and video. The idea is that you can enter in certain parameters and the generator will come up with its best answer, picture, or clip. While automated trading isn’t exactly the same, it does operate on a similar concept. You have a program that’s pre-set with certain rules to follow, and it executes trades for you.
There are a couple of benefits to this. One is that you can execute a lot of trades in a short amount of time. The more successful trades you can do, the more money you can make, theoretically. The other is that it removes the human element of emotion. Your attachments may cloud your judgment, which can be disastrous. So, while there is still the human concept of strategizing and setting the rules for trades, the automated system will do the rest for you.
1 Benefits of Automated Trading
There are many benefits to using an automated system for futures trading and tracking the market in search of opportunities. The first, as mentioned, is time. Algorithms can do the work for you, which means trades are executed in a matter of seconds at most. As you know, those seconds can mean a lot when it comes to the outcome of a trade. Any delay can change the landscape of a transaction, which means you may not get its full benefit. This doesn’t even account for the fact that you get that extra time back, and you can use it for things like developing relationships with clients.
Let’s face it: humans make mistakes. An algorithm removes human error from the equation as long as the parameters you can have set for it are clear and unambiguous. These rules can be strengthened with a system’s ability to backtest. Seeing what has happened previously will help you set smart rules for going forward.
Along with not being perfect, humans have emotions. When it comes to trading, the feelings that can get you into trouble include fear, greed, and intuition, not based on facts. Machine-led trading will take all of those off the table, allowing you to make trades based wholly on facts. This will give you the ultimate discipline in making smart trades.
2 Why Is a Balanced Portfolio So Important
Last, but probably most important, it makes it easier for an investor to have a diverse portfolio. With an algorithm, they can monitor for opportunities and execute trades in a number of different markets simultaneously. This spreads the risk around in case there’s a slowdown or a crash.
As an example, suppose you invested in two airline stocks. With the vagaries of the airline industry, the performance of those stocks will probably rise and fail in concert with each other. For instance, a global pandemic could massively affect the tourism industry. In this case, you may reap the benefits when the industry is firing on all cylinders, but you will suffer when there’s a slowdown.
However, suppose instead of having investments in two airlines, you had investments in one airline and one oil company. When the price of oil goes up, the airlines might have some troubles because their expenses will rise, and they will have to pass that cost onto the consumer. Your airline shares might suffer, but your oil shares will prosper. You will have mitigated your risk by diversifying your portfolio. There are many ways to do this, and you can achieve them with the help of automated systems.
3 How Automated Trading Systems Help With Diversification
You can diversify your portfolio in different ways. You can invest in stocks that are negatively correlated, like airlines and oil. However, you can also invest in stocks that are uncorrelated, meaning that the success or failure of one does not affect the success or failure of the other. Depending on how you configure it, an algorithm can tell you how much or little correlation there is between stocks. It will analyze past performance to determine a correlation coefficient. The lower that figure is, the more diverse your choices will be.
Not only that, but an automated trading system will be able to scan multiple markets. This allows further opportunities for diversification. For example, rice in China would have no bearing on the automobile market in the United States. As a human, you would have to scan multiple markets for opportunities, which would take hours upon hours of work. Your automated system can do it in a snap, including while you are sleeping.
An algorithm can also execute several strategies at once. You can run a negative correlation strategy and an uncorrelated strategy at the same time so that you are getting benefits from both. It can even combine them to a certain extent, should you wish it to do so.
There is certainly something to be said for making investments in a single or limited number of industries if you are certain that they will perform well. However, nothing is certain, and that kind of approach carries with it significant risk if things don’t work out. By having a balanced portfolio that builds in diversification, you will prevent risk and allow your portfolio to grow.