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Robot trader: what is it? | Skilling.com

A robot trader analyzing stock market data on a computer screen.

The image of a trader shouting orders on the stock exchange floor has long been a symbol of the hustle and bustle of the market. 

Now, it seems the shouting has been outsourced to something entirely different — robot traders. Yes, you read that right; robots are now heavily involved in trading and investing. 

But how do they work and what are their pros and cons? 

What is a robot trader?

A robot trader is an advanced technology used in the stock market to automate trading operations. It uses algorithms and artificial intelligence to identify the best opportunities for buying and selling assets on the Stock Exchange, making it an attractive alternative for individuals seeking agility in their operations.

This type of trading focuses on short-term operations and is commonly used in day trading, swing trading and scalping.

By automating the entry and exit positions, a robot trader helps traders transform their strategies into automated systems, allowing them to monitor negotiations without having to constantly watch market fluctuations.

One of the key advantages of a robot trader is the elimination of the emotional factor. 

As trades are executed based on predetermined algorithms, there's no room for anxiety or other emotional responses that can affect decision-making in short-term operations. This makes robot traders an efficient and reliable tool for both seasoned traders and those new to the stock exchange.

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How does it work?

A robot trader works by executing trades automatically based on pre-configured strategies and objectives. These trading robots are programmed by software developers and can be tailored to suit various trading strategies.

Once the robot trader is set up, it carries out tasks with a high level of precision. The algorithm follows certain parameters to function optimally. These include:

  • Stops and limits: These are thresholds set to automatically close a trade when it reaches a certain value, either for profit (limit) or to prevent further loss (stop loss).
  • Average interval of operations: This is the average time between trades.
  • Daily profit and loss target: This is the specific financial goal for each day.
  • Conditions of purchase and sale: These are the specific circumstances under which the robot will execute a trade.
  • Goal per day, week, or month: This sets the overall trading targets for different periods.
  • The assets and derivatives that will be operated: These are the specific financial instruments that the robot will trade.

Once these parameters are set, the robot trader operates automatically whenever the predefined conditions are met during the trading session.

To use a robot trader on the Stock Exchange, you must have an account with a stock brokerage. This is because the robot uses this account to execute trades on your behalf.

Pros and cons of robot trader

Pros:

  1. No need for constant market monitoring: Robot traders automatically perform trades based on pre-set parameters, eliminating the need for you to continuously watch the market.
  2. Reduces psychological bias: Unlike human traders, robots aren't influenced by emotions such as fear or greed. This leads to unbiased and emotion-free trading decisions.
  3. Minimises human errors: Robot traders execute trades with precision, reducing the chance of mistakes that could occur in manual trading.
  4. Ability to operate multiple strategies simultaneously: Since robot traders are automated, they can handle more than one strategy at a time, increasing the potential for gains.
  5. Reduces anxiety and greed with automatic stops: Automatic stop-loss and take-profit points can be set, reducing emotional reactions and unnecessary risks.
  6. Backtesting capability: Robot traders allow for backtesting, where you can test trading strategies using historical data to assess their viability before implementation.
  7. Agility in order execution: Robot traders can execute trades at high speed, which is particularly beneficial in volatile markets where timing is crucial.

Cons:

  1. Algorithmic failures: Like any software, there's a risk that the algorithm driving the robot trader could malfunction or experience glitches, potentially leading to incorrect trades.
  2. Unsatisfactory performance: Not all robot traders deliver the desired returns. Performance can vary greatly depending on the specific robot used.

Trading robot vs investing robot

Trading robots and investing robots are both types of automated systems used in financial markets, but they serve different purposes and operate in distinct ways.

  • Trading robots: These are designed for short-term operations, primarily executing buy and sell orders on the Stock Exchange. They are typically used for high-frequency trading (HFT), placing a large number of orders at high speed across multiple platforms based on pre-programmed instructions. The focus of trading robots is to capitalise on short-term market fluctuations, making them a popular choice for day traders. They can save time, reduce errors, and minimise the emotional impact of trading, potentially increasing profit opportunities.
  • Investing robots: This term is more general and includes both trading robots and advisory robots. Advisory robots, which include robot managers and robot advisors, provide medium to long-term investment suggestions, follow market trends, and can assemble a portfolio according to the investor's profile. Unlike trading robots, they are not focused on executing trades but rather on providing advice or managing portfolios.

The key difference between these two types of robots lies in their behaviour. Trading robots are designed for rapid, high-volume trading, while investing robots are geared towards longer-term investment strategies and portfolio management.

Summary

It's important to remember that while robot traders offer numerous advantages, they also come with inherent risks. Therefore, it's crucial to thoroughly research the strategy and ensure you're using a high-quality service when employing trading robots.

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FAQs

What is a robot trader?

It is an automated software program designed to execute trades in financial markets. It follows pre-set rules and algorithms, making buy and sell decisions based on specific market conditions.

How does a robot trader work?

It works by executing trades automatically based on pre-configured strategies and objectives. These can include stop gain and stop loss thresholds, average interval of operations, daily profit and loss target, conditions of purchase and sale, goal per day, week or month, and the specific assets and derivatives to be traded. Once these parameters are set, the robot operates automatically whenever the predefined conditions are met during the trading session.

What are the advantages of using a robot trader?

Some advantages include not needing to constantly monitor the market, reducing psychological bias in trading decisions, minimising human errors, ability to operate multiple strategies simultaneously, and agility in order execution.

What are the potential downsides of using a robot trader?

Potential downsides include the possibility for the algorithm to fail, and unsatisfactory performance depending on the specific robot used. Also, while they can minimise human error, they can't completely eliminate risk, as market conditions can change rapidly and unpredictably.

Can a robot trader guarantee profits?

No, a robot trader cannot guarantee profits. While it can execute trades based on predefined parameters and strategies, the outcome of these trades is dependent on market conditions, which can be unpredictable. It's important to thoroughly research and understand any trading strategy before using a robot trader.

Can anyone use a robot trader?

Yes, anyone can use a robot trader, but it's important to have a basic understanding of trading and the financial markets. You also need to have an account with a stock brokerage for the robot trader to execute trades on your behalf.

How can I start using a robot trader?

To start using a robot trader, you first need to choose a robot trading platform or software that suits your trading strategy and goals. Then, you'll need to set up your trading parameters and connect the robot to your brokerage account. Always ensure to test the robot trader using a demo account before going live.

This article is offered for general information and does not constitute investment advice. Please be informed that currently, Skilling is only offering CFDs.

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