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Balancing Risk vs. Reward: Is Trading Software Worth Using?

25 August 2020 No Comment

Trading software provides individuals with automated trading systems. These let traders create certain rules for entries and exits that, after being programmed, can be executed automatically via a device. It’s estimated that 80% of shares traded on the U.S. stock exchange today are generated by an automatic trading system.

When someone begins looking for trading software, they are likely going to want to know if it is worth the investment. Learn more about it and what it offers below.

Reduce Cases of Emotional Trading with Software

With the right software, it is possible to reduce the impact of emotions on the trading process. When emotions are kept in check, traders will find that it is easier to stick to their original plan. Because the trade orders are handled automatically after the trade rules are met, traders won’t be able to question or hesitate with the trade. This also helps traders who find they are hesitant to “pull the trigger” and it is beneficial for those who may overtrade.

Backtesting

With backtesting, trading rules are applied to the historical market data to figure out how viable an idea is. When creating a system for automated trading, the rules must be absolute and leave no room for individual interpretation. The computer isn’t able to guess and it must be told precisely what to do. Traders are able to create these precise rules and then test them on the historical data that is available before they risk their own money with live trading. With careful backtesting, traders can analyze and fine-tune their trading ideas and determine how much they are risking.

Preserving Discipline in the Trading Process

Since the trade rules are established and trade execution is handled automatically, the trader’s discipline will be preserved even in situations where a volatile market is involved. Sometimes, discipline will be lost because of emotional factors, including the fear of taking a loss or the desire to try to earn a higher amount of profit from the trade being made. With automated trading, discipline will be maintained because the original trading plan is followed precisely. Also, issues related to “pilot error” will be reduced. For example, with an order to purchase 100 shares, there will be no mistakes.

Increased Entry Speed for Orders

Because a computer can immediately respond to the changing market conditions, automated systems can generate orders when the set trade criteria has been met. Getting into or out of trades just a few seconds early can make a huge difference in the outcome of the trade. Right when the position is entered, all the other orders are generated automatically, which includes profit targets and protective stop losses. It is well known that markets can move quickly, and it is somewhat demoralizing to have trades reach the profit target or move past the stop-loss level before the order is even entered. With the right software and automated system, this can be prevented.

The Bottom Line

Each person must decide on their own if trading software is something they should invest in. Be sure to keep the information here in mind to get the desired results from the trading that a person does. Also, remember that not all software is created the same, so it is imperative to research the options before making a decision regarding what to use.

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