Typical Mistakes in Algorithmic Trading

Algorithmic trading is a trading style that limits mistakes made due to irrational behavior by allowing a computer to execute the orders. And while the method is proven to be efficient, it isn’t entirely risk-free. Here are several typical mistakes that algo-traders make and how to avoid them.  

#1: Not Being Prepared for the Unexpected

Relying blindly on your computer is a grave mistake that can cost you a fortune. In trading, everything can happen at any given moment, and it is your job to anticipate the unexpected. Your Internet connection can get interrupted, and your servers might stop working, your area can experience a blackout, etc. It is your job to be prepared for such scenarios and to limit your losses by not risking more than you are ready to lose. The first rule of trading is that one bad moment can end a trading career, so do your best to prevent that from happening by making sure that you have contingency plans.

#2: Ignoring Market Principles

Do NOT ignore sound market principles just because a particular indicator predicts promising results. Building a trading strategy exclusively around a single indicator is dangerous and risky, and while it may work a few times, in the end, it will cost you a significant amount of money, if not everything. Be smart and explore all avenues, look for reliable, data-based, proven market principles that back the findings of the indicator.

 #3: Ignoring the Importance of Training

Buying a powerful computer and expensive trading software won’t make you a successful algo-trader. This strategy will most likely backfire and cost you your savings. Professional traders go to school to better understand how the world of the economy works, and you should take the time to do the same. Enroll in algorithmic training to learn the basics of trading and world economy, and use that training to hone your trading skills so that you can make educated decisions based on solid facts instead of impulse choices. 

#4: Not Keeping a Trade Journal

All successful traders have one thing in common – they all keep detailed trade journals. Whether your trading is automated or discretionary, a journal will allow you to keep track of your successes and mistakes so that you can determine your strengths and weaknesses and work on the latter to become a better trader. 

#5: Ignoring Past Results

History is full of good ideas that aren’t compatible with the reality of things. Just because something looks good, it doesn’t mean that it will work, especially if you have already tried it and it failed. Good traders are flexible and aren’t afraid to change their strategy or make adjustments to generate profit. 

#6: Not Having Stops

Knowing when to stop is of paramount importance to prevent you from letting your losses grow. Stops are used to limit risk, and good traders have them on both trade and strategy levels. Ignoring the key role that stops play is a frequent mistake among novice traders, and most of them never recover from their error. 

Now that you know five of the most common mistakes in algo-trading and how to avoid them, you can start preparing yourself for a career as a trader by joining training classes to better understand the ins and outs of this modern trading method and the software that it uses. 

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