The Rise of Algorithmic Trading: Why Manual Trading is Losing Ground
6 mins read

By: sarvesh

The Rise of Algorithmic Trading: Why Manual Trading is Losing Ground

The Turning Point

Some people may criticize me in the comments for writing this article, but manual trading is for losers. I'll never forget the night when I was up late, browsing an algorithmic trading forum. I engaged in a conversation with an experienced algorithmic trader, and I was on the verge of sending him $10,000 in cryptocurrency to learn his algorithmic trading strategies. However, what he said that night on the online forum had a profound impact on me, changing my trading career forever. It actually made me despise manual trading. After reading this, you might feel the same way. In this article, I'm going to share with you the seven reasons why I dislike manual trading and the one piece of advice from that algorithmic trader that completely transformed my perspective on trading.

The Importance of Being Mechanical

As I sat there, in conversation with the algorithmic trader, contemplating sending him $10,000 to learn his methods, he shared something with me that remains etched in my memory. He said, "Adam, if you genuinely have a trading system, it should be mechanical." Essentially, this means that your trading system should adhere to a precise set of rules—a principle emphasized in countless trading books. They stress that a trading system must be rule-based and executed with unwavering discipline, akin to a robot.

He further explained that if your trading system comprises clear rules, those rules should be programmable. In other words, if you cannot program your rules or trading strategy, it implies that you are trading based on gut feelings or emotions. This is one of the primary reasons why so many traders fail, reinforcing my belief that manual trading is for losers. Statistically, over 95% of manual traders end up as losers.

He continued to enlighten me during our conversation that night, emphasizing that the most successful hedge funds do not rely on manual trading strategies. Instead, they develop algorithms and employ human oversight to monitor these algorithms.

Reflecting on his words, it struck me like a lightning bolt. I had an epiphany: if I am genuinely trading using a systematic approach with well-defined rules, then it should be programmable and executed flawlessly. Otherwise, my trading strategy is reliant on luck, resembling a gamble. So, here are seven reasons why I disdain manual trading and why I firmly believe that algorithmic trading can increase your odds by a factor of ten.


The Significance of Clear Rules

Reason number one: As I mentioned earlier, a trading strategy should be mechanical. This means that your current trading strategy likely has specific rules governing when to enter a trade, when to exit, and how much risk to take per trade.

If you have clear and well-defined rules, they should be capable of automation and programming into an algorithm. To illustrate this concept, imagine playing basketball with clearly marked court boundaries that distinguish between in-bounds and out-of-bounds areas. When you step on that boundary line, you're considered either in or out, depending on the rules.

Now, imagine a scenario where half the time you step on that line, it's considered in-bounds, and the other half, it's considered out-of-bounds. This is analogous to trading without clearly defined mechanical rules—it's like playing by ambiguous rules. So, why bother having rules in the first place?

Not having well-defined rules in trading would be akin to watching a basketball game with ever-changing, unpredictable boundaries. It would make both watching basketball and your trading experience extremely frustrating and ineffective.

Speed and Efficiency Matters

The second reason I dislike manual trading: it relates to the issues of speed and efficiency. After all, we are human beings, and our ability to act swiftly has its limits. You can only click the "sell" button once you spot a trade setup, and then you must physically click the button to execute it. This lag in speed and efficiency creates a delay between the moment a market opportunity arises and when you can efficiently act on that trading setup.

As you're aware, financial markets can move rapidly, and opportunities can vanish in the blink of an eye. To illustrate this, consider the analogy of snail mail versus email. In the past, snail mail was the standard mode of communication, and it served its purpose. However, when email emerged, it revolutionized communication by allowing near-instantaneous connections worldwide. This leap in speed and efficiency transformed the way we interacted.

In the context of trading, why would you choose to trade using outdated "snail mail" technology when contemporary tools enable execution at significantly higher speeds and efficiency?

Trading Around the Clock

The third reason: We, as human beings, are inherently emotional, and this is a significant challenge in trading. Emotions, particularly fear and greed, are among the biggest pitfalls for traders.

Consider this: Casinos often thrive on the emotions of their patrons. They understand that if a million dollars in bets are placed at their tables and games, some bets will win, some will lose, but by consistently playing the odds, they will profit, typically around 5% or $50,000 from that million-dollar action.

Even though casinos might have nights where they lose money or a streak of losing nights, they never turn away potential customers. Why? Because they know their edge, and they welcome more money into the casino, confident that the odds are in their favor. Over time, they will achieve their 5% profit on the total wagers.

Now, think about the average person's experience in a Las Vegas casino. You often hear stories like, "I was winning big, but then greed took over, and I ended up losing more than I started with." If you ask people about their experiences in Vegas, you'll find that this pattern holds true for the majority.

So, the reason I favor algorithmic trading: it offers a way to trade without succumbing to these emotional pitfalls. It provides the means for emotionless trading, which is a goal many traders aspire to achieve.

The Power of Precision

Reason number four: It's a game-changer—the ability to backtest. While it's possible to backtest a manual trading strategy, it's an arduous and time-consuming process if you've ever attempted it.

Manual backtesting is prone to human errors and subjectivity. Moreover, it's nearly impossible to generate as much data as you can with automated trading strategies or algorithms. In mere minutes or hours, you can gather years' worth of data when backtesting an automated system. In contrast, manually backtesting a trading strategy for years' worth of data could take weeks, if not longer.

In trading, having more data is crucial for making informed decisions. It provides a deeper understanding of your trading strategy's robustness. Automated trading allows you to leverage extensive historical data quickly, which is a significant advantage.

Overcoming Emotional Biases

Reason number five: It's all about 24/7 trading. As manual traders and human beings, we have limitations in terms of when we can effectively trade. Most of us can only maintain focus and concentration for one or two hours at most each day before fatigue sets in or distractions take over. In today's world filled with social media, constant notifications, and various distractions, maintaining focus can be incredibly challenging.

What I truly appreciate about algorithmic trading is its ability to operate 24/7. Think of it like a security system at your home, such as Ring. Ring, with its continuous monitoring, looks for potential intruders around the clock to keep your property safe.

Similarly, manual trading for just one or two hours a day is akin to having your security system active for only brief periods, searching for opportunities to "catch bad guys." However, when you trade algorithmically and can remain exposed to the markets 24/7, you are not only safer but also have more opportunities to capitalize on market movements.

Advantages of 24/7 Trading

Reason number six: Precision is paramount. In Mark Douglas's renowned book, "Trading in the Zone," he emphasizes the importance of executing your trading edge without hesitation. One common problem many traders face is that they spot their trading setups but lack the discipline to act promptly. They hesitate, overanalyze, seek additional confirmations, and as a result, they might miss potentially profitable trades.

Algorithmic trading excels in this regard by executing precisely when the criteria for a trade are met. When it's time to enter a trade, the algorithm acts swiftly—no hesitation.

Consider it a technological advancement, much like the evolution of car manufacturing. In the past, cars were assembled by human beings on an assembly line. However, today, car manufacturers no longer rely on human hands alone. They employ machines and robots for assembly, driven by one critical factor: precision.

These machines can repeat the same process flawlessly, consistently, and much faster than a human worker ever could. Just as high-tech production lines have human overseers to ensure everything runs smoothly, algorithmic trading has traders who monitor the algorithms, ensuring precision and efficiency in executing trades.


Facing the Challenges of Manual Trading

The seventh and most significant reason: Manual trading is exceptionally challenging, and the success rate is dismally low throughout the trading industry.

While some may argue that a few individuals have achieved success as manual traders, my personal experience paints a different picture. When I attempted to learn manual trading, I faced immense difficulties. I lacked the required discipline, consistency, and the ability to think in terms of probabilities, let alone execute a trading strategy flawlessly. Despite my repeated attempts, I couldn't break through.

I experimented with taking signals, learning from various mentors, but nothing allowed me to become a consistently profitable trader until I ventured into algorithmic trading. It was only then that I began to see signs of success and consistency. Algorithmic trading enabled me to execute trades with the precision of a trading robot.

Furthermore, within our algorithmic trading community, we regularly welcome individuals who, month after month, have struggled with various manual trading strategies without finding consistent success. It's only when they transition to algorithmic trading, often due to the reasons we've discussed previously, that they finally discover their edge.

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