Algorithmic trading (AT) is the top choice among today’s consumers who want to earn a profit from the markets for a few hours per week or more. The question for the many thousands of newcomers is how to avoid making the same old errors over and over.
The answer is to use the experience of others as a self-teaching tool to maximize your own bottom line from algorithmic trades in niches like forex, equities, commodities, cryptocurrency, index funds, and more.
Even with the inherent automation of algorithm-based trading, it’s still essential for new and experienced account holders to focus on employing the best practices of the discipline.
In short, that means being careful not to use leverage until you’re ready and, even then, being careful to avoid overdoing it. Other preventable but common pitfalls include not performing enough research, never reading classic books on the subject, doing a poor job of managing risk, missing out on the benefits of back-testing, failing to use demo accounts, and not taking the time to team up with a top-notch data vendor.
Check out the details about each error below to make stronger, better-informed trades day in and day out. AT software keeps getting better, so why not use all its features to supercharge your own performance?
Error: Using Too Much Leverage
Algorithmic software is getting better every few months. That’s how fast the technology is advancing. With all that tech power behind you, it’s tempting to use high amounts of leverage in the hopes of big profits.
While many individuals do earn high dollar returns when employing leverage of 10-to-1 or greater, it’s a risky proposition. Particularly for newer investors and trading enthusiasts, leverage is a classic example of a double-edged sword.
Unfortunately, it only takes a few losses to eat up account capital and stall out a trader’s activity for weeks or months. Until you have at least one full-time year of experience, keep leverage at or near the 1:1 mark.
Oversight: Not Doing Enough Deep Research & Reading
When people devote time to researching their preferred market niches and reading books on pertinent topics, they can propel their AT practice to new heights. That’s just one of the many promising features of algorithmic trading.
Technology is great, but when users empower themselves with advanced knowledge, AT’s tech tools become even more potent. As the decade progresses, individuals who are committed to educating themselves will reap the benefits of all that AT has to offer.
Another aspect of reading and staying current is related to technology. Always strive to stay in the loop about new tech solutions like software packages, apps, and various platforms that offer the most up-to-date functionality.
The auto-trading solutions by AvaTrade are among the industry’s most cutting-edge offerings for folks who are brand new to the markets and for those who have several years of experience. There’s no substitute for reading excellent books and staying abreast of the rapid technological changes that occur in the securities markets.
Mistake: Not Managing Risk
Use advanced features of your software to better manage overall and individual position risk. When individuals ignore the inherent risks of putting their hard-earned capital on the line, they become susceptible to frequent losses.
However, because most of the latest AT products come with built-in risk management tools, it’s now easier than ever to keep the safety factor high when buying and selling all kinds of securities.
One reason behind the massive growth of algorithmic software is its sophistication. Between now and 2030, it’s likely that the offerings will include even more safety features that consumers desire.
Error: Not Back-Testing New Strategies & Methods
Because AT tools offer extensive back-testing functionality, there’s no excuse to use a system without doing trial runs. Whether your technique is complex or simple, consider using at least two years of past data to see how it would have performed. While back-testing offers no guarantees of future success, it’s a great way to work kinks and errors out of a trading technique.
Using An Unreliable Data Vendor
There are about a dozen top-ranked data providers. Be sure to use one that offers financial information, not just economic or business reports. What you want is real-time, accurate market numbers. Most of the popular trading platforms have their preferred vendor you can use.
However, it’s imperative to check for accuracy and timeliness before committing to a vendor, especially if you pay a separate fee for the information. Never assume that a vendor is reliable just because your broker uses them. Do your due diligence.
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