Algorithmic trading generates 90% in turnovers for traders embracing cutting edge-solutions, such as automated trading software. However, most traders are still relying on exchange terminals and manual trading. The automated trading system empowers traders with access to quality trading tools via quick simple, processes. However, automated trading strategies are also susceptible to risks. Read below to discover how to minimize the risks of automated trading strategies.
What Is Automated Trading Software?
An automated trading software allows traders to establish specific rules for trade entries and exits that can be executed automatically once programmed via a computer. Various reports indicate that 70% or more shares traded on the US Stock exchanges originate from automatic trading systems.
Unfortunately, in the real world, opportunities to boost earnings tend to come with a risk of increased losses. Automated trading presents its own challenges, and newcomers should keep such risks in mind before diving in.
For example, there is a slight chance that a cybercriminal or a hacker could gain unauthorized entry to the trading bot and steal the API keys. Stable connections between the trading bot and the trader’s personal exchange account depend on the API access feature.
Other risks of automated trading strategies or systems include applying inappropriate settings, unexpected shifts in the market, or algorithm errors.
How to Minimize these Risks
If you lack expert trading knowledge, chances are you will throw your money down the drain. Fortunately, with platforms such as All Markets Trading, you can learn to copy experts and their trades. To reduce the risks of losing big, whether you are a beginning trader or are new to a social trading platform, baby steps are crucial.
Take minimal steps at the start and stick to an exchange’s minimum order. You can try running multiple orders at the minimum value to experiment with the trading bot safely.
The more small steps you take, the more accustomed you are to the automated trading system and the lesser you are exposed to the risk of heavy losses.
Watch out for black box bots
Black box bots promise traders to help them earn money after depositing their money with them via a smart contract.
On the other hand, genuine trading bots only run through your account on reputable exchanges, and a trader should be able to monitor all the bot’s orders/trades. Your API keys should not permit the trading bot to withdraw funds from your exchange account. Allowing the trading bot permission to process trades is sufficient enough for any automated trading strategies.
Constant monitoring of your trading activities beats the logic of having automated trading software. Although it would be great to switch on automated trading and leave it unattended, automated trading requires some degree of monitoring.
There is usually a potential for technology failures, such as computer crashes, power losses, or connectivity issues. Moreover, an automated trading system may experience anomalies that could lead to duplicate orders, missing orders, or errant orders. Regular monitoring ensures that these risk-causing factors are identified and resolved as soon as possible.
One of the parent risks in automated trading software and trading systems, in general, is being scammed. Some trading systems promise unreasonably high profits for a low price. So how do you tell whether a trading system is legit or not?
Scrutinize any fees you would have to pay before paying or laying down any money. If you don’t ask questions, you are exposing yourself to the risk of being scammed.
Research well and ensure you know every important detail about the automated trading system. If possible, read the terms and conditions before agreeing to them.
You can also check financial regulatory or third-party sites for reviews and testimonials of the automated trading software before using it.
Finally, does the trading system come with a trial period?
The 1% rule
Most copy traders and traders, in general, consider the 1% rule. This rule of thumb suggests that a trader should not put more than 1% of their capital or trading account into a single trade. Therefore, if your trading account has $100,000, your position in any particular instrument should not be more than $1,000.
Fortunately, it is not a definitive rule, and you can go as high as 2% if you can afford it. The majority of traders with accounts that have higher balances may opt to go with a lower percentage. The reason is that as your account size increases, so too does the position. Keeping your limit below 2% is a sure way to reduce risking substantial amounts from your account.
Stop-loss and Take-profit
Losing money on a trade is not a good picture. However, if your automated software trade is losing money, it is vital to set up a stop-loss point to sell the financial instrument to avoid complete wiping of your instrument.
Such stop-loss points protect against the commonly flawed psychology that trades will bounce back.
Cap risks wisely
Ensure you cap your risk and create a new account on your preferred exchange. This move tends to limit your potential losses in worst-case scenarios.
High-volume pair trading
Prioritize safety by only trading pairs of a high volume. Such a pairing would have sufficient volatility to enable trading bots to accomplish their goals and proper liquidity to close positions when appropriate.
Trade with regulated brokers
This is the most important risk-mitigating factor to consider. A regulated broker like INFINOX for automated trading systems has all the features that help guarantee a genuine and smooth trade. Check if the automated trading software is licensed to provide such services. User experience is also a key factor when scrutinizing the broker. Is the system functioning looking reliable?
All Markets Trading System is an industry leader in the automated trading software category. One of the system’s benefits is a custom-made strategy that makes a technical analysis of the market and provides you with that info. Having features that help you minimize risks, it is up to you to be diligent to mitigate risks you may face from automated trading software.