In 2022, 58% of Americans admitted to owning stocks. But for would-be traders who want to go beyond their employer-backed 401(k), it’s not a matter of if they’ll invest — the question is how they plan to do it.
As a trader, you’ve got two options at your disposal. You can go through the traditional process of entering positions and giving instructions over the phone. Or you can press a few buttons and let an algorithm trade on your behalf.
Sound too good to be true? It isn’t. Automated trading makes all of this possible and more.
If you’re weighing your trading options, you’ve come to the right place.
You might also like
First, we’ll talk about manual trading. Then, we’ll talk about automated trading. Finally, we’ll explain how you can choose the best option for your trading journey.
Keep reading to find out more.
Manual Trading
For many non-institutional traders and investors, the words “manual trading” are seldom used verbatim. Why? Because manual trading is how a lot of people enter and exit positions.
Like the name says on the tin, manual trading is what happens when you enter or exit a position on your own, without the help of technology. If you’ve had to log into your investment account, search for a stock, and then buy it, you’ve made a manual trade.
What Are the Benefits of Manual Trading?
That gives you a general overview of the manual trading process. But it doesn’t explain why some people choose manual trading over automated trading. Here’s a short list of reasons why manual trading is a preferred investment method for many:
1. You Can Start Trading Right Away
By the time you’re ready to trade with money, a few things have already happened.
You’ve spent time looking for a trading strategy. You’ve familiarized yourself with a particular industry or stock category. If you’re an especially careful person, you’ve probably spent a few weeks paper trading.
In other words, you’re ready to start trading in live market conditions.
With most brokers, your first deposit may be a bit delayed. But once that initial setup is done, you can start trading right away. All you have to do is search up the stock and buy it — or short it — depending on your general trading philosophy.
With an automated system, you have to spend time programming your algorithm. Then you’ll need to backtest it, run practice accounts, and spend time modifying the model until you’re happy with it.
If you’re the type of person who believes in simple trading processes, manual trades will have a special appeal to you.
2. You Can Perform Due Diligence
Think about the first time you bought a car.
Even if you made the purchase sight unseen, you likely spent a lot of time learning about things like fuel mileage, maintenance, and oil checks. And chances are if you took a poll around your workplace, you wouldn’t be the only person who did this type of research. Because buying a car is the definition of a major purchase, you needed to make sure that the dealer wasn’t ripping you off.
Most manual traders do the same type of reading and analysis when they’re thinking about buying stocks. If they’re fundamental investors, they’ll be looking at both the company’s financials and the viability of its business model. Meanwhile, technical traders will be studying their indicators before entering or exiting a position.
When you’re buying and selling stocks by hand, you can develop a deeper understanding of the stocks you choose to buy and sell.
3. You Have to Respond to Changing Market Conditions
At the time of this writing, 2020 was the year of the most recent major stock market crash. This suddenness of the crash wasn’t the only reason for surprise, however, the stocks that underperformed were also cause for concern.
According to ScienceDirect, natural gas, tech, and healthcare were all sectors that did extremely well during the COVID-19 pandemic. Meanwhile, companies in the hospitality and entertainment fields, to name two underperforming sectors, saw their share prices take a tumble.
In a normal market, petroleum and hospitality stocks aren’t bad investments. However, in the 2020 market, these stocks fell off a cliff. If your algorithmic trading strategy revolved around these sectors, you likely had a difficult time getting positive returns in 2020. But as a manual trader with the benefit of a computer that can access the news, you would have had an easy time responding to the changing market conditions.
As a manual trader, you can buy and sell stocks at your discretion. This gives you an element of flexibility that can’t be underestimated during tumultuous times.
What Are the Downsides of Manual Trading?
You might have read that list of benefits and thought, “Manual trading just makes sense.”. But the truth is that trading by hand is a strategy that comes with serious downsides. Here are some of the reasons why many traders choose to avoid manual trading if they can help it:
1. It’s Easy to Miss Trading Opportunities
On any given market day, tens of thousands of companies get traded. However, manual traders only have two eyes and a couple of computer monitors to work with.
There could be an amazing trade setup going on. But if you happen to be monitoring a different chart or researching a different company, the opening may be gone by the time you’re looking at the correct stock.
And even if you could catch every potential trade during standard business hours, there are markets, like the Forex, that trade 24 hours a day.
When you’re entering all your trades manually, you can’t take advantage of every opportunity that’s available to you. Meanwhile, algorithms can monitor all exchanges at all times.
2. It’s Easy to Start Trading Emotionally
Have you ever cheered for a team even though you knew it was a lost cause? Although you’d think that traders would be the first people to cut their losses and follow the money, many folks have a hard time dropping unprofitable companies.
When you’re a manual trader, the final sale is decided by you. And even when every unnecessary minute is costing you money in the long run, it can be tempting to root for the underdog company.
For this reason, manual traders can have a hard time calling it quits with a stock when they need to.
3. It’s Hard to Be Profitable Long-Term
In 2020, CNBC reported that 85% of professional traders struggled to hit their benchmarks over longer periods of time. Or to put it another way, only 15% of professional traders were able to generate consistent long-term profits.
To make matters worse, the numbers for amateur traders weren’t much better. According to one study, just 3% of day traders were able to remain profitable over the course of a year.
There are lots of theories out there about why this happens. Maybe people fall in love with the wrong companies. Maybe they get overconfident after a few months of profitable trading.
When you’re trading manually, it becomes a lot more difficult to test out new ideas efficiently. This, in turn, makes it a lot harder to make continuous improvements to your trading strategy.
Algo Trading
Algo, or algorithmic, trading is an option that allows you to implement your preferred trading strategy. Much like manual trading, you’ll be entering and exiting positions. However, the algorithm program will do the actual trade execution.
You can work a day job. You can sleep late and work regular business hours if that’s what you prefer. The algorithm will continue to trade in the background without any intervention from you.
What Are the Benefits of Algo Trading?
We’ve given you an overview of how algo trading works. Here are just a few of the reasons why 60% to 73% of US equity trading accounts rely on algorithms:
1. Algos Remove the Emotional Element
We talked a bit earlier about how traders are often tempted to stay in positions for longer than they should. When a company’s shares are in freefall, however, this need to hang on can make a trade unprofitable.
Computer trading is the closest thing to having a robot enter positions for you. The algorithm won’t scan news headlines while hoping against hope that the stock will bounce back. It’ll simply sell the stock.
Algo trading has the potential to instantly make you a more disciplined trader.
2. Trade 24/7
Between the US markets, the global markets, and the foreign exchange, the market never sleeps. However, even if you’re unusually good at tracking and timing trades, you still need to sleep, eat, and spend time with your loved ones.
Algorithms can expand your markets while entering trades at all hours. If you’ve ever worried that you were leaving money on the table while getting ready for bed, algo trading can put all of those fears to rest.
3. Algo Trading Is Accepted on Many Trading Platforms
The idea of having a program trade on your behalf might sound like a sci-fi storyline or a hack that brokers would frown upon. But the truth is that algo trading is actually well-accepted.
Wall Street uses algorithms to trade and many trading platforms are algorithm-friendly. You can trade and program your algorithm without risking your brokerage account.
4. Technology Is Continuing to Develop
Algorithmic trading is a step up from the days of trading on the floor or sending instructions over the phone. However, stock market tech is still evolving.
As we’ve begun making advances with machine learning and artificial intelligence, for instance, AI trading is poised to add a new level of sophistication to the algo trading strategies we’ve all become familiar with. Automated trading allows you to remain on the cutting edge of technology.
What Are the Downsides of Algo Trading?
With that list of benefits, you might be wondering if algo trading has any risks. As it turns out, there are some factors that algo traders need to be aware of at all times. Here’s a list of algo trading downsides:
1. You Have to Develop Your Algos
Algo trading has game-changing potential for traders. But there’s no escaping the fact that algorithms are only as effective as the human who programs them.
You can’t just enter a few lines and expect your algorithm to make you a millionaire. You’ll have to spend time backtesting your algorithms and making sure that your list of rules doesn’t have any unintended consequences associated with it. If you’re not an especially tech-savvy person, this can be a tall order.
Luckily, sites like kjtradingsystems.com can teach you how to make profitable trading algorithms.
2. You Have to Monitor Performance
Just because the algorithm can enter trades on your behalf manually, that doesn’t mean that you shouldn’t monitor the algorithm at all. You’ll want to watch your algorithm like a hawk to ensure that it’s still performing as intended.
Depending on how many algorithms you’ve programmed, this can quickly start to feel like a full-time job. However, if you don’t monitor your algorithms, you won’t be able to respond if market conditions take an adverse turn.
3. Emotions Are Still in the Picture
The algorithm might not have any feelings. But algo traders can still be emotional traders.
You can find yourself obsessing about certain industries. You could hold on to an algorithm that needs to be retired.
Algorithms can take the hesitation out of day-to-day trading. However, you’ll still need to demonstrate discipline in the development and deployment of your algo. With more markets and more trades in the picture, undisciplined algo traders can lose a lot of money in record time.
Manual Trading vs Automated Trading
Every aspiring investor has to spend time learning about the different types of trading. Beyond the usual questions around swing trading and day trading, however, there’s also the issue of manual or automated trading.
Fortunately, the solution is pretty simple.
If you’re not buying a lot of companies or if you have a buy-and-hold investment style, manual trading might be your best bet. But if you plan to make lots of trades on a regular basis, algo trading can take your stock market strategy to new heights.
Was this article helpful? Check out the rest of our Finance section to see more content like this!
