The technology of trading currencies has come a long way since the necessity of physically buying foreign currencies from your banker. The introduction of Forwards, Futures, Options, and various other derivatives have enabled investors to capture the opportunities in appreciating and depreciation currencies in a far more powerful way.
The introduction of internet technology has further increased the accessibility of currency trading to the masses with countless web platforms and virtual services. These countless forex trading mediums can be polarized into two main spectrums: Manual Trading and Automated Trading. Of course there is room in between these two spectrums for hybrid models which facilitates various degrees or elements of each methodology – Trade Genius Group for example is one of a few rising platforms that has made it to create a hybrid solution, is that your best choice as an investor? Let’s have a look at the different option.
The World is Flat
Perhaps the most phenomenal influence the internet has had on currency trading is the availability and rapidity of information affecting prices around the world. This has equipped traders around the world with live-time tools for technical and fundamental analysis. The instantaneity of influential information has caused the market to shift closer to strong efficiency from semi-strong efficiency. This has changed the so-called “rules” of price movement and analysis of prices.
How Profit is Achieved When Everyone has Relevant Information
In 2014, it is reasonable to say that prices reflect past historical as well as immediate information. Therefore price movements are strongly influenced by new variables and outlier variables. Virtually all traders are following the same charts, deriving the same signals from commonly viewed price levels and technical indicators, and examining the same economic announcements. This makes achieving abnormal profits an almost impossible feat. Abnormal returns, ie. true profits, are only achieved through advanced pattern analysis or capitalization of large unpredictable macroeconomic events.
Defining the Spectrum
As mentioned above, the two ends of the spectrum for analyzing and trading currencies are manual trading and automated trading. Manual trading is a method by which a trader will analyzes the market through and instruments he chooses to trade through their own efforts /resources and then manually execute trades through their trading platform. Automated Trading is the implementation of any forex trading system which will automatically execute trades based on a set of algorithmic or logical rules it applies to the information it scans. Of course there is room in between these two spectrums for hybrid models which facilitates various degrees or elements of each methodology.
By virtue of the term, manual trading is performed by human beings. It is therefore limited by various human attributes. The most severe of many limitations are time constraints, computational power and emotion. Ensuring real profits as opposed to random entails the identification of opportunities which deviate from status quo economic announcements and commonly used technical indicators. Identifying these opportunities not only requires monitoring the market for as many hours in the day as possible, but also the availability to execute the trade in the short window of time for which it presents itself. Additionally, manual trading is limited to hours of the day which the trader is awake and has access to their platform. Referring back to market efficiency, in order to predict non-random changes in price, a trader must be able to analyze information deeper and more powerful than the relevant accessible information available to the millions of other traders evaluating the same variables. Unlike computers, human beings have limited capacity to compute a multitude of variables simultaneously. This would therefore limit a person’s capacity to generate abnormal profits. Human beings have an inability to completely remove emotional biases, faulty heuristics, and psychological errors from all decision making. This is an extremely apparent detriment in the manual trading method.
Manual trading has redeeming factors despite its many limitations. Unlike algorithms and automated systems, human beings do not make decisions on a set of fixed rules or collections of logic. This makes manual trading less susceptible to large unpredictable macro-economic events or shifts in economic climates and trends. Experience, knowledge and intuition can many times outperform computation logic simply because buyers and sellers are human. Therefore, supply and demand are influenced by human variables which most computers cannot analyze or predict.
Stand-alone forex trading systems without maintenance or adaptation are mere sets of static rules and processes. More advanced systems can adapt or change based on another set of fixed rules and processes for adjustment. The forces which influence the currency market are neither static nor fixed. This means that all automated trading methods either require human maintenance and adaptation, or have a finite lifespan for which they can profit abnormally. Most algorithms and automated trading products are subject to hindsight bias of their creators. Before launched, these systems are back-tested for the previous year until results are attractive. Obviously, the success of computational logic in one year is not necessarily correlated to the upcoming year. Finally, algorithmic trading systems are highly exposed to large unpredictable macroeconomic events or shifts in economic climates.
Automated systems overcome all the constraints of human traders revealed in the manual trading examination above. Automated systems can execute trades twenty four hours a day and seven days a week. They execute trades the instant and profitable opportunity is calculated. The decisions these systems make are objective and uniform because they are not subject to intuition or emotion. Automated trading systems can compute vast amount of variables, scan an enormous amount of information, and process everything in large or infinitely small timeframes. This the most significant strength because it allows for recognizing opportunities which are not available to the masses of traders. This enables abnormal profit taking.
Hybrid is the Solution
Locating the optimal point on the spectrum between automated and manual trading is the key.
By nominating a third party manual trader, and automatically copying their trades, most of the limitations relating to time are eliminated. However, like pure manual trading, the nominated trader is subject to all the emotional biases, faulty heuristics, and psychological errors which detriment profitable trading.
Many traders apply algorithms or robots to derive signals. The trader would then manually execute the signals he or she see fit. Like purely automated trading systems, these robots require monitoring and adaptation. While this method allows for powerful computation, the trader is still subject to time constraints and emotional biases towards the signals and risk management.
Algo & Financial Team Hybrid
This method is simultaneously the most powerful and least exposed to unpredictable changes in the market. This system entails a financial team constantly analyzing the shifting forces in the currency market .The algorithmic team monitors and adjusts the automated trading system according to the ongoing instruction of the financial team. This method requires high levels of funding and infrastructure.
These algorithms attempt to capture the behavioral pattern of traders on the web through social media and various search engines. This behavior is summarized into logical rules which trigger automated execution of trades. While this method is more adaptive than pure automated trading, its ability effectively predict currency price movements is yet to be proven.
The ultimate goal in financial trading is achieving abnormal profits at any given level of risk, for a sustainable period of time. As web and mobile technology flatten the world with respect to information availability and instantaneity, the level of sophistication required for achieving this goal is exponentially increasing. The taste for manual trading or automated trading is still perceived as a subjective matter. It is evident that investing in a hybrid method which includes the adaptability of manual trading and the computational power and objectivity of automated trading will ensure the highest probability of real sustainable profitability. In recent years, organizations which effectively coordinate algorithmic and financial professionals have proven to be most successful.