John’s E-Mini S&P 500 Futures Day Trading Targets and Trading Plan

Three reasons automated trading doesn't work

If you understand even a little bit about trading then you might know the saying “The market isn’t perfect.” If it was then everyone would be making money.  Because the market isn’t perfect is a big reason why auto trading or trading robots don’t work. Sure they might work for a few days or a few weeks or even a few months, but the reality is the program the auto trader is using is essentially a robot.

A robot is unable to make a judgment call.  A robot is programmed to follow a set of instruction. Those instructions could include such rules as when a Moving Average and a MACD both do something simultaneously then the robot is instructed to buy immediately. This type of programming is typically based on history and seeing that the success rate in the past has been efficient enough to warrant a trade to take place. Robots or computer programs are taking over and they are great when you understand what they are truly trying to do; however, most auto trading systems do not share how it is programmed or what it is programmed to do. They charge a large upfront service fee and provide you statistics on what you could have made if you used their services in the past. Besides, if you knew what the auto trading system was programmed to do would you need their services in the first place? But allow me to take you back to making a judgment call. If you are driving in your car and you approach a stop light obviously the natural thing to do is to stop. As you come to a full stop there are two cars in front of you at the stop light. A robot, just like any human, will wait for the light to turn green to go. Once the light turns green the “instructions” are met and the robot will go. But you and I know that we can’t truly start going until the two cars in front of us move first. Sounds simple right? But the robot is following the green light instruction and goes full steam ahead. The robot crashes into the car ahead of it causing damage to itself and the car in front of it. Clearly, if the robot was able to make a judgment call then it would have waited for the two cars ahead of it to proceed before hitting the gas pedal. Perhaps waiting may have caused us to miss the trading opportunity but we would have avoided the crash which cost us more by making us lose money for car repairs.

Not only can a robot not make judgment calls but a robot can’t make adjustments. A huge reason why the market isn’t perfect is because of the human factor.  The market is controlled by traders. Traders are human. Humans make errors.  Trading indicators were developed to try to eliminate human errors, but it just made newer traders more dependent on indicators rather than learning how the market truly moves. A car salesman is going to have a hard time selling someone a green car if the prospective buyer is looking for a white car. Without going into too much detail, trading is very similar. If I’m looking for a white car then there is a certain set of criteria that I’m looking for including price. I have a certain price in my head that I want to pay for a white car that meets my needs. However, some people will change their criteria and agree to buy a green car if the price is right.  What we don’t know is how many people will settle for a green car and how many people are set on a white car?  More importantly, at what price difference will someone settle for the green car?  So if there are two identical cars that meet your needs and the only difference is one is white and one is green. How much of a discount would you require to settle for the green one? This happens every day in the markets. Believe it or not, someone who has the correct training can identify this scenario and overcome it. A robot can not.  Heck, most programmers can’t either yet you want to trust your money in their hands? To translate- trading is similar to buying a stock at $15 it drops to $12.5 and the robot sells it because it is instructed to do so if price drops by 15% of the purchase price. Once the robot exits your trade the stock then pushes up to $20. You missed out on profits because the robot failed to recognize that there were more people willing to buy the green car at a price 15% less than the white one.

Dang! You missed out on some good profits due to a program that initiated a sell after a 15% drop. Well some would think that is an easy fix. Have the program change the criteria to sell after a 20% drop instead of 15%. That leads me into the third reason why trading robots do not work…

Auto trading systems are convenient for people who are not willing to put in the work to make their own money. Most auto trading systems have the best intentions. But one thing you must remember is that there is always someone smarter than you and has more money than you. If someone is smart enough to program a trading system that starts to work then there is someone smart enough to program a system to counter it. If your auto trading system automatically exits you from a trade after a 20% drop then there will be a program that places all the real buyers at 25-30% of the drop. Just enough to get you to sell your stocks to them and they’ll ride the profit wave leaving you in the dust.  Think about it. How often have you exited a trade whether it be your own doing or an auto trading system only to miss the huge amounts of profits just out of your grasp? Are you wondering how that happened?

If this sounds familiar then it is simple. You don’t understand the markets. And if so it might be time for you to learn the market before the market takes you out.

Once you learn what the smart money is doing in the markets you can learn to jump on their bandwagon.

Learn more at www.johnsemini.com

John Nguyen