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Auto-trading and some of the Reasons why it does not Work in the Long-run

Auto-trading and some of the Reasons why it does not Work in the Long-run

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autotradingAuto-trading is one of the currently most-hyped ways of succeeding in the world of online binary options trading, but the purported benefits of auto-trading expand far above and beyond binary options.

It is indeed an attractive option for the masses of traders who do not possess proper knowledge of the markets, of the various trading strategies and of how successful binary options trading should work to begin with.

Some liken auto-trading to copy-trading, but the two are very different animals indeed.

Copy-trading is about copying the trades of a successful trader. A real person is behind these trades, a real person who applies his own set of strategies in order to yield hopefully successful trades.

It’s safe to say copy-traders are essentially riding the coat-tails of successful traders, without knowing any of the details of the strategies used by these people.

Auto-trading on the other hand is mechanical trading. It is based on a set of fixed and pre-determined rules which tell the trader when to enter or exit trades, or even manage them, without actually analyzing the existing market conditions.

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Mechanical trading systems almost always rely on past data analysis to create an edge for the trader.

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The way such mechanical trading systems work isn’t rocket-science. In fact, it’s surprisingly simple and straightforward: most such systems use technical analysis tools and indicators such as Fibonacci analysis, trend lines and of course the concept of support and resistance levels.

These means of analysis are coded into a system which applies them to a given data set and draws its pre-programmed conclusions.

The problem with such systems is though that they’re all built on historical data sets, and that’s how they’re tested as well. Their real-time performance will however differ from their performance based on past data sets.

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Auto-trading systems built on oscillator-type indicators like the commodity channel index or the stochastic oscillator are absolutely doomed to fail as well, due to the nature of the free market.

With the exception of initial public offerings (IPOs), trades do not actually create value: they just see value change hands in a zero-sum market.

That also means that the overbought and oversold levels oscillator-type indicators are supposed to identify simply do not exist.

The bottom line is that anything built on analysis of past data is not useful for the prediction of future trends. This is just a basic truth. Does that mean that there are no usable auto-traders out there at all?

No it doesn’t. There are efficient walk-forward analysis methods used by programmers to create auto-trading software, and this solution to the problems represented by past data set analysis can in fact result in a real edge for the trader.

In a nutshell, walk-forward analysis is about granting a bigger importance/weight to the more recent sections of the analyzed past data set.

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Such auto-trading systems offer a great deal of advantages to the trader: besides freeing him up completely, they make decisions unaffected by human error and emotions.

All this only makes any sense though is the system is actually able to turn a meaningful profit…

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