The term “auto trading” means different things to different people. This makes it so that the risks of automatic trading depend on which type is being talked about. In one sense, the term refers to the use of software to execute trades in a live account. Another sense refers to allowing a broker to execute trades for an investor “automatically” – with no input from the investor. Both of these carry risks, but they are quite different from each other.
Using a Service to Perform Trades
There are many risks involved with this practice, which involves signing up for an investment newsletter and then allowing the newsletter operators to instruct your broker to make the trades recommended in the publication. These risks are common to many investment advice schemes: The newsletter’s performance may be overstated, its operators may have serious conflicts of interest, or it may be an outright scam. Keep in mind if you are using a discount broker, they are not authorized to consult or assist any advisor with respect to recommendations or strategies contained in any advisor or trade alert published by any advisor. The broker’s sole responsibility will be to execute transactions for your account. As an Auto Trader, your investment object is speculation and will be recorded as such in the broker’s records.
To mitigate these risks, the SEC says to make sure to do plenty of due diligence, including following the money to see who can benefit from the trades and how. This agency also warns would-be investors to watch out for cherry-picked testimonials and profit reports, noting that some newsletters scrub their reports of negative results and bad reviews.
Using a Robot to Perform Trades
Even though this is another type of auto trading that requires no investor input, the risks involved are quite different. Here, the main risk is that the program can perform a series of bad trades before the investor even realizes what’s going on. With any robotic automation, the effects of errors are greatly amplified since the program does not know what its actions cause or the effects of the market. In the face of that, it continues like normal, working quickly. Its lack of emotion and inability to second-guess itself can be good when the conditions are right, but the same factors make able to put an investor into bankruptcy.
Mitigating these risks requires careful thought at the time the program is set up. Be sure to do more than tell it when to start buying or selling. It needs to know when to stop its current activities and either become idle or reverse course. You should be sure to update its triggers and stops on a regular basis to keep up with changing market conditions.
No matter which type of automatic trading you use, auto trading or robotic trading, you should remember that naturally it could be riskier to put your brokerage account in the hands of someone or something other than yourself. There is no “safe” or “guaranteed” trading strategy. Therefore, what is the overall answer to the question “what are auto trading risks?” Before making a decision to engage in auto trading you should perform the due diligence necessary to ensure that the concept of auto trading and the strategies of your newsletter publisher are compatible with your investment strategy. For robotic trading, your account can be hit with trades that you wouldn’t have wanted to make if you had been holding the reigns – and that these trades can cost you big money.
Options involve risk and are not suitable for all investors. Prior to trading options, you must be approved for options trading and read the Characteristics and Risks of Standardized Options. A copy may also be requested via email at email@example.com or via mail to Regal, 950 Milwaukee Ave., Ste. 102, Glenview, IL 60025. Online trading has inherent risks due to loss of online services or delays from system performance, risk parameters, market conditions, and erroneous or unavailable market data.