The Magic of Automated Investing and Why It’s Taking Over

Consider the following scenario: you’ve been tasked with the task of digging a hole. What steps would you take to dig that hole?

What do you do when you look at the ground and immediately begin scraping away layers of dirt with your bare hands until your hands are worn and bloodied? Clearly not, as this is both painful and ineffective. A normal person would dig their holes with a shovel or even a motorized excavator, and the reason is simple: it is more efficient. Because those tools were created to make digging less painful and more practical – they are there to make our lives easier.

This has been a recurring theme throughout history. We take labor-intensive and time-consuming processes and, to the extent possible, eliminate their labor- and time-intensive characteristics. There are examples of this in almost every aspect of our lives, from alarm clocks that wake us up in the morning to coffee machines that grind, filter, and add milk to our coffee, to public transportation that does not require drivers.

Therefore, what is it about manual investing that attracts people? What makes millions of private investors so unique is their attempt (and failure) to trade solely on their gut feelings and intuition. Indeed, the situation has deteriorated to the point where an estimated 80% of private investors who engage in day trading actually lose money. That is correct, 80% of the population. Despite this, throngs of inexperienced traders continue to swarm the markets in an apparent masochistic bid to profit.

However, more than 60% of the world’s top-performing hedge funds used automated trading (bots) in 2020 to maximize their profits, and you can bet your bottom dollar that they were a success. Consider the performance of Tiger Global hedge fund manager Chase Coleman, who generated $3 billion in profits while earning a 48 percent return on his investments. While such a stark contrast between private and institutional gains may appear unjust, it is simply a matter of institutions being resourceful.

Remember how in the first sentence of this paragraph we discussed digging a hole? Consider the following scenario: private investors are digging with their hands, while institutions have arrived with a 35-tonne excavator and completed the job before you could even begin.

What is so great about automated investing?

As I have spent the majority of this article discussing how ineffective manual trading is in comparison to the might of automated trading bots, you may be wondering why this is the case.
Allow me to take a step back and provide an overview of trading bots, what they are, how they work, and why they are superior.

In essence, a trading bot automatically purchases and sells assets on an exchange.
You create your own bot and program it to adhere to certain rules that you devise.
E.g. When this occurs, either buy or sell this asset.
Typically, these bots will adhere to rules established by technical indicators and will make decisions based on factors such as Relative Strength or price candles.
The objective is to forecast when a price change will occur and to buy or sell ahead of time in order to profit – and then to repeat the process indefinitely.

However, you can accomplish this on your own, correct?
It’s not difficult to analyze technical indicators on a chart and place trades, is it?
If it were that simple, then 80 percent of private investors would not be utter failures.
The reality is that bots will always be superior, and here’s why.

They don’t freak out

Trading is stressful, and trading notoriously volatile cryptocurrencies frequently results in large tufts of hair being pulled out.
It’s emotionally draining, and emotionally exhausted traders are prone to make poor, irrational trades.
Whether you invest your entire portfolio out of fear of missing out (FOMO) or sell early due to good old FUD (fear, uncertainty, and doubt), trading on emotion has been a recipe for disaster since the practice’s inception.

They’re quicker than you’ll ever be

This advantage should come as no surprise to anyone familiar with the concept of a robot.
A trading bot is capable of executing an infinite number of transactions, far more than a human is physically capable of.
Thousands of computations and transactions are running 24 hours a day, regardless of the timezone in which you are.
This is another significant factor in the history of Wall Street’s use of this technology.

Since you started reading this paragraph, a trading bot may have already executed several profitable trades on your behalf.

You can train your bot

While practice makes perfect, you should not deploy your first bot blindly into the wild west of cryptocurrency trading. Instead, you should backtest and refine it.
Backtesting is the process of analyzing historical exchange data to determine how your algorithm would have performed in that environment.
I frequently refer to this as the sharpest weapon in any trader’s arsenal, and it most certainly is when executed properly.

Additionally, walk-forward testing (also known as paper trading or virtual trading) can be used to evaluate bots. This involves deploying your bot to a simulated live market and observing how it would perform right now.
Another reason why this method of trading is objectively superior is the unrestricted ability to thoroughly test and refine your automated strategies.

More disciplined than a zen master

Discipline is critical to success in any endeavor, and trading is no exception.
The best part about investing via bots is that no discipline is required.
That will be handled by your bot.
It makes no difference whether the market is flatlining, bouncing up and down, dropping, or shooting to the moon; bots are unconcerned.

Why aren’t more people using trading bots if they’re so good?

*The time machine begins to whirr.
Consider 1999 – „Amazon is by far the best way to purchase books.“

“If Amazon is so fantastic, how come people still visit bookstores!”

This is the type of conversation that you would have witnessed repeatedly at the turn of the millennium.
Do you see what I’m saying here?
Simply because a practice continues to be popular does not mean it is the most efficient way to conduct business.
There are two reasons why many people did not use Amazon in 2000.
1) They were unaware of it; and 2) There was a significant technical barrier, as many people had never used the internet.

Both of these reasons apply to automated bot trading in the modern era.
While awareness of bot trading is increasing, there are still many who have not been exposed to it and those who have encountered/may encounter a high technical barrier.

The future of bot trading

Thus, where do we stand? Well. Automation is becoming increasingly prevalent in our lives and will continue to do so. It gradually takes over industries one by one, removing the need for manual intervention, and the financial world, specifically the world of investing, will not be immune.

Every day, solutions for everyday people like you and me emerge. Wall Street is no longer the gatekeeper of this cutting-edge technology, and anyone interested in automating their strategies can do so by having bots do the work for them. Numerous companies are attempting to popularize automated trading.

Trality, for example, a Vienna-based company, aims to make bot trading accessible to anyone who requires it through an environment rich in powerful tools and educational content. The company has received significant attention and funding for its efforts and is rapidly growing. If, after reading this article, you want to take a deeper dive into the subject and get a well-rounded education in Trading bots, then check out their beginner’s guide.

The magic

After reading this article, it should be clear why mega-institutions have been lining their pockets with this revolutionary technology for years.
The reality is that automated trading is not magical at all.

The combination of hard data, rules, and mathematics enables your bot to make rational decisions about when to buy and sell without regard for emotion.
If you are still manually trading at this point, you should be fearful, as this is what you are competing against in the marketplace.
If you believe you can defeat an ever-growing army of bots, then best of luck to you.