Algorithmic trading systems have a long list of advantages over other forms of buying and selling, not the least of which is the fact that at the end of the day, your own perceptions and emotional connections tend to at least somewhat guide your thinking. The potential trouble there is that your emotional instincts, while serving you well in interpersonal relationships, might be working against your ability to maximize profit. This is simply because money doesn’t feel. It doesn’t get its feelings hurt if you buy or sell a given stock at a given point in time. It’s merely a transaction that occurs, or does not occur.
Consider the following example. In October, 2013, there was an accident on a highway, and a Tesla Model S sedan was involved. After the crash, the vehicle caught fire. In response to this crash, a large number of people, acting mostly on the basis of emotion, began selling the stock. It’s price tumbled. But was that a rational move?

 

That is to say, was there anything fundamentally unusual about a car catching fire?
Sadly not. This happens every day. It’s such a common occurrence that it’s seldom reported on the news. In Atlanta, in the summertime, local radio DJ’s make a joke of it, reporting on how many cars there are in the emergency lane, burning away.
But Tesla represents emerging technology, and the sight of one burning paints an image of new, unstable technology, which causes people to panic. Had these people been using some kind of automated trading routine, emotion would have been kept out of the equation, and the decision to buy or sell would have been rooted firmly in the company’s fundamentals, which remained unchanged. The bottom line is still that the Tesla Motor company is currently the only company on the planet that can boast an all electric car with a travel range in excess of two hundred miles, and now that they have partnered with Toyota and resolved their transmission issues, they’re poised for greatness. The recent unfortunate fire (which was not caused by any of the new technology in the car itself) doesn’t change any of that.
Of course, Automated Trading Systems, being rules based, are only as good as the rules that define and govern them. That is to say that for an ATS to work optimally, it must undergo constant review and back testing. There must be a never ending willingness on the part of those who designed the system to continually revisit and incrementally improve it. Provided that willingness is present, utilizing an ATS to maximize your profits only makes sense.

 

Chris Vermeulen