WHY AUTOMATIC TRADING SYSTEMS ? ?

Any investor who takes just a short time operating in stock market or does not know this world, soon he will reach a conclusion when the inevitable losses comes, then he realizes that something is not going well, some time ago he was winning and now is losing (or he loses without never have won)..,. then he will feel disturbed and have to choose among 3 possible choices in function of his personality, that are, to leave operating in the stock market, to trust that the things improve and go on, or finally realizing that he does not have knowledge to win throughout the time and decides to learn more.

And then is when we find with the mainest handicaps to survive in this wild world: our psychology and our knowledge, any deficiency in some of these aspects will take us sooner or later to lose ours valued money.

The investor that choose to leave the stock market will go disappointed, by lack of capital or boredom, and perhaps blaming to others or even the stock market by his bad luck, without thinking that perhaps he expected to be shoemaker without knowing how to change a heel. The one that continued relyng on in his way of operating , although he recovers his losses at first, he will ended up losing if ihe goes on operating , because his optimism and self-confidence are the trees that prevent to see the whole forest , whoever who knows how to play poker can beat to the poker world champion, but if he plays many games against him , he will ended up losing.

Finally, the investor who dedicates itself to learn and to handle his money with knowledge and common sense will end sooner or later in trading systems, either based on technical analysis (statistical models, tendencies, etc...), or based on fundamental analysis (financial statements of a company, macroeconomics, etc...) or a combination of both.

This way, sooner or later the investor who thinks over it, realizes that either he handles his money on his own knowledge, forming himself if they are insufficient, or trusts other organizations to do it, like investment funds or firms like Autrading, using systems based on its analyses

A trading system is basically a set of rules on which we based operations in stock market. These rules cannot be chosen lightly and they must pass harsh test before starting up, some guarantees are needed so that they work in the future.

And here we will be with many aspects to consider, such as the number of winning operations of our system, for example, if there are 60% of winning operations we will have to consider that the remaining 40% of lossing operations do not exceed the benefits. Also we will consider the commissions of the broker and slippage (the difference between the price which we must have entered in a position and the one that we really obtained due to the own fluctuation of the prices), since often we will see systems that apparently are perfect, but stop being it when applying to them these costs.

Also we will observe as those gains come, it can be that our system were quite right, but perhaps those gains come from a few operations that supply much money, and then we will face the following problems: those operations were the result of the some important news? another ones of similar importance will take place in the future ?, ... if one takes place in the future... when will it come? if it takes long to come , will we be able psychologically and financially to hold during lost months? and if it does not arrive in years ? . We just have to take a look to the past to see that there are years of strong tendency and in others the markets hardly move .

Besides, we must put our system under numerous test in order to verify its principles are sound enough, either testing to see how our system gains and drawdown (the maximum losses bore during a period of time, for example, one year) are affected if some of the rules of our system that before were trustworthy, stops working by a period of time, or making test that gives us the behavior of the system under situations extremely adverse or unusual for it.

We will have to plan depending on those test when our system work as expected , or when it has left the right way and it will be good idea to stop it..., we have to be careful with not to forget that no matter how much we study and we work on stock market, we are not with treasury bills that always give benefits , the stock markets keep permanently in a evolving state that we do not have left any choice but to follow it if we do not want to go out of business. Everyone that invests in stock market must know that there are risks, and depending on how we value them we will have to act. Here our financial and psychological capacity comes into play.

And talking about psychology, are we really prepared emotionally to get on this rollercoaster of gains and losses?. To many it will seem an absurd aspect , but it is not the same thing to see the war by the television that be in a real front war situation where you can be shooted . In a real war we will face the fear and we will be put under stress , we know enough about ourselves to be sure that we will make appropriate decisions under pressure? , who is in the stock market never acts without pressure. Therefore on our capacity to leave it aside or to know as we behave under pressure our money depends.

 

Some people go depresses or scares when they loses and stop operate in a bad run which always arises, there is also who is quite self-confident and feels very sure of his system and goes on operating even if it is notl working well...

The psychology of each one is important, and much more to know who we are and how we behave, because once in the market, we are going to face to it, to our fears, prejudices, our tendency to optimism or to pesimism... and that it is going to weigh in our decisions.

And so the automatic systems comes up, out of the necessity of following a plan that must be strictly fulfilled , bearing the losses when they come, gathering the profits at the moment that our system considers necessary, letting to them run when we have gained much, stop it when its behavior begins to show that something is going wrong...

This way we taught to a computer to follow our system and to operate strictly by its rules, with the advantage that we get ride of the situations like " I have gained much and I close my position already", or emotions like "I am losing and I leave because I do not want to lose much more ", being sometimes right and sometimes wrong

If we let us influence by our emotions, we will end up ruining our system, because losses and profits would change according to our beliefs of which we guess it is going to happen, instead of acting according to rules proven right based on our statistics and probabilities. To pass of the mathematics and common sense to let emotions take over, always finishes in the same place: losses and more losses .

We could think that most of the operators of stock market or managers do not use computerized automatic systems, and indeed they don't , but let us be aware that most of these managers by the nature of his methods of investment (mainly if they are based on fundamental analysis) they do not need to be permanently in front of a computer, paying attention of what happens, in addition they do not manage its own money, so they are not put under many pressures. Those who devote to manage their own patrimony have instilled a strong discipline. In addition they are profesionals and working on it all the day taking decisions, something that the nonprofessional investor cannot do. The things are different when this professional manager must move many accounts and each one with his system, then he has to resort to computerize his systems and to let the computers operate, and much more if his systems open and close operations inside the day. As we see computer science is in all the aspects of the stockmarket.

So the automated systems comes up to help us, taking care of following our system without emotions, while we spent our time in which it pleases to us, giving more possibilities to the small and professional investor.

Finally, we want to explain that a computer is not going to make money for us, it is the system that we sweated and developed the

one that is going to do it.... that is, we are on our own with our knowledge those who won or lose, the computer is a mere tool.

Luis David Auñón
Autrading.com