There’s a few things that make manual trading different from automated trading. Aside from the obvious of not having to place the orders, there’s differences in the way you might identify opportunities.
Key Characteristics of Manual Trading
Key characteristics for manual trading can include watching price action, understanding fundamentals at the time and analyzing the technical situation presented on the chart. While manual trading offers some excellent opportunities to identify market conditions that are ripe, there are also some pitfalls that can be eradicated through automation.
Manual trading allows for the use of discretion. This can be a blessing at times and a curse the majority of the time. This is one reason why risk management is absolutely essential. Unusual opportunities can be identified and traded through manual trading, that perhaps may not be worth coding. Manual trading can allow for discretion when conditions are slightly altered to the norm. This can be useful when the market being traded is thoroughly understood, and can often lead to a few more pips out of some trades. On the flips side, discretion can sometimes interfere with a trader and create potential for error.
As discretion changes each trade, along with timing and an array of other factors, so to does the strategy’s ability to be accurately back-tested. When viewing charts in a historic sense, it is far easier to see what worked and what didn’t, than compared to what you would have done trading in the field, in real time.
Key Characteristics of Automated Trading
Automated trading is really the same as manual trading in how things work. The difference is, it is limited by your coding ability (or funding of a coder). Automated trading relies on situations repeating over and over, in the same framework that has been laid out. That means no discretion, however it means consistency. It also means the ability to back-test history at the press of a button. This gives you the ability to see if your algorithm can stand the test of time, and know within minutes whether your system has the potential to generate a profit or not.
Often, automated trading consists of technical aspects of trading. Some technical tools and price action can determine fundamental direction however it is somewhat limited. Of course, some coders have the ability to determine fundamental outlook through algorithms, this is another level of coding, plus a high level of knowing what markets do in certain conditions fundamentally. So sticking to the basics, many algorithms are technical.
There is one key difference between manual and automated trading. One, the automation allows continuous monitoring of the market. Two, it allows for consistency in results in terms of following rules and can be predictable in what the algorithm will do in preset conditions. Three, and most importantly, it follows the same trades, over and over regardless of how the trader is feeling at the time.
While manual trading is incredible, offering great returns, it also poses issues of consistency in human emotion, availability and focus. Automated trading allows the ability to create a consistent, unwavering and non-tiring machine. One that will perform when you aren’t at your peak, and while you sleep. It will perform consistently and generate data that gives you confidence in letting it run and make you money over time.
Manual trading is a great way to start trading and to learn how the markets act and react to all kinds of conditions. Once you develop the skill of trading, you can progress to coding algorithms that repeat your education over and over without you needing to watch the charts all day.
As you put time towards creating new algorithms, your portfolio grows and works for you. Rather than focusing on the tasks a computer can do, you can create new and improved trading strategies that will make you more money with less pressure. If you stop working, you simply rely on the code to continue. Manual traders do not have that luxury, and that also means less time finding additional edges in the market.