Automated Trading

A significant advantage of automated strategies is their decision-making is entirely explicit and you can determine exactly why a decision was taken. This is never the case with human decision-making.

The determinism of automated strategies also allows for back testing. Run a given price series through a given trading model and you will get the same set of trades. That is also never going to be true of humans. That predictability allows for statistically rigorous testing of both the strategy and its parameters.

However, the difficulty is this may just better perfect your models explanation of the past – the classic problem of over-fitting, adding large numbers of explanatory variables and then solving for an unstable combination of parameters, when your objective, of course, is to resolve a model to predict the future.

For this to work, you will generally need a fairly simple strategy. Simple models are not good at incorporating context, and therein lies the Achilles heel.  Humans will be aware of an unscheduled news conference, the content of which may swamp the model’s signal; the model cannot be.

Automated strategies do have the advantage of taking the emotion out of trading. But humans can mitigate against the emotional challenges of trading by controlling their trade size.