Are robots taking over the exchanges? From artificial intelligence to clone to bot trading, these technological innovations dramatically impact the nature of trading. We examine each of these trading technologies, their definitions and origins, pros and cons, and how we may prepare for a technologically enabled financial future.


Bot Trading

Bots allow traders to trade and monitor their positions using customizable parameters without being glued to their screens the entire time. Traders can set parameters like entry, exit, and money management rules so that their trade can be automated even when they are asleep. Bot trading is also known as automated trading, algorithmic trading, or system trading.


Origins of Bot Trading

It began in 1949 when Richard Donchian introduced automated trading to the world when he presented his set of rules to buy and sell funds. Later in the 1980s, John Henry, a famous trader, began popularising these rule-based trading strategies. By 2008, Jon Stein launched a proper automated trading system, named Betterment, a software to automate trading. Today, automated high-frequency trading and trading bots have since evolved and are managing huge assets in exchanges worldwide, even crypto exchanges.


Advantages and Disadvantages of Bot Trading


The Advantages

Bots are not influenced by human emotions

Trading bots are just pieces of code, software that can automate your trade orders. While human traders can get scared or overly greedy, which leads to bad decisions and sometimes losses, a bot will stick to the trading plan and strategy no matter what.

Bots can work faster than humans

You can key in your desired parameters and trade rules and get your bot to scan the market in a matter of seconds. If you try to do this manually, it will take longer, and you may miss opportunities, especially when entering an order. Bots will work four or five times much faster than you.

Bots can trade 24/7

Bots don’t need to sleep, eat, or drink, unlike their human traders. It means you can set the Bots to trade and watch any market in the world regardless of time.


Bots can multi-task better

You can assign your bot with any tasks as you like for or things like entries and exits, stop-loss orders, and profit targets, and your bot will not throw a tantrum at all. It can operate it all simultaneously.


Bots make backtesting easy

You can try backtesting to test out possible trading strategies against historical data and use it to optimize your chosen plan. Still, if you do this manually, it is complex and will take a long time. If you use a trading bot, backtesting becomes fast and easy.


Bots make it easy for anyone to start trading

With the internet, anyone can download a trading bot for any given market. It makes it easy for beginners to learn and get started.


The Disadvantages

Hackers can hack bots

A trading bot is just software, which makes it susceptible to being hacked and taken over. Be sure to do your research and take the appropriate security measures to avoid this possibility.


You need good software and hardware

Bots are software. You can expect constant updates. Just make sure that your computer can support the latest updates without any trouble.


Good bots are not cheap

Although there is some free bot trading software, what you pay is what you get. The better trading bot tends to have a monthly subscription or even an annual fee that could lock you into trading payments long after you’ve decided to take a break from the market.


Bots need a constant internet connection

A laggy internet connection will cause delays or faults in the server, resulting in glitches or prompting the bot to trade incorrectly. Sometimes, even the most sophisticated bots can suffer glitches, be open to fraud or security issues, and experience downtime.


Bots cannot learn or adapt like humans

Bots can only operate based on how they were programmed initially and their past performance, which can be a disadvantage regularly if there are market abnormalities. Enabling a “set and forget” strategy using bots is a terrible idea. Traders, especially crypto traders, should always be careful about monitoring their positions.


Bots don’t understand fundamental analysis

While humans can read the latest news and trends to form fundamental research on a market’s possible movement, bots can’t. Bots are only good at technical analysis involves reading historical market statistics and price charts to predict what might happen in the future. If a significant event should occur, a bot will not consider that, severely affecting its ability to trade effectively.


Bots are only able to operate in one market direction

If the market is choppy, moving sideways, or if the price movement is horizontal, this affects the bots’ functionality. It can only perform well if there are positive trends and trading signals because of its inherent design.


Beware of the data-mining bias

A data-mining bias is when an analyst frequently combs sample data to identify a pattern, which sometimes results in undue significance given to a market event caused by an accident or an unforeseen set of circumstances. Similarly, bots will pick a backtest and present it to the trader – even if the data from that backtest, even if that data is untested.


Final Thoughts on Bot Trading

For better or worse, bot trading is a quick band-aid. They would work for a while given the right conditions, but they are not an ideal solution. The biggest drawback is that Bots have no learning algorithm and cannot make decisions based on real-time data. Instead, it will just carry on executing the rules you have set for it even if the conditions are not right, and it may result in a loss. Given the limitations of bot trading, traders sometimes explore other solutions.



Copy-trading (a.k.a social trading)

Copy Trading (a.k.a social trading) allows novice traders in the financial markets to automatically copy positions opened and managed by top-performing traders. Unlike mirror trading, a method that enables traders to copy specific strategies, copy trading links a portion of the copying trader’s funds to the copied top trader’s account.

It is an attractive proposition for novices to copy the best trader with several hundred percent performances over the year. For a trader’s profile to appear in the top traders’ list to follow, they need to have achieved at least several dozen percent increases.


Origins of Copy Trading

Copy-trading (a.k.a social trading) emerged from automated trading around 2005, where traders were sharing their trading history that others could follow. It was also about the same time when social media was on the rise. Today, there are many platforms with the copy trading feature.


Advantages and Disadvantages of Copy Trading


The Advantages

It guides new traders

People who are new to the trading market look for an effective strategy that works. Copy-trading allows them to learn wealth-building tactics from successful traders. New traders don’t have to do extensive research or even know a lot about the market to start trading straight away. The idea is that if they follow professional traders that do well, then they should do well.


It doesn’t require a lot of thought

Copy trading is as easy as a click of a button. New traders can invest in whatever they like or choose to watch the professional traders before deciding to imitate what they do. They could even choose to follow other professional traders if they feel that they perform better.


It’s another way to manage risk

Copy-trading empowers new traders by allowing them to observe how professional traders work risk while staying ahead of market trends. New traders can learn from as many professional traders as they want.


The Disadvantages

It doesn’t show you how to set your trade

A new trader’s account allocation to the market signal is often set too high per the trader’s allowed leverage – this could cause a premature execution of a stop-loss order.


It does not teach you how to diversify your investments

Social-trading makes professional traders look like superstars in their asset class, like foreign exchange (forex) trading or crypto. So new traders tend to forget that it is perilous to invest in one asset class.


You may overlook market signals

Copy-trading tends to yield insufficient diversification among market signals. Also, the return of different market signals correlates in the same direction.


Always do due diligence

Sometimes, statistics are manipulated on the copy-trading network, making risky signals better than they are. Besides, some market signal purporting to be a manual trade is a bot that runs without human supervision. New traders also neglect to consider the possibility of programming bugs that could lead to substantial loss. New traders could also be subject to survivorship bias, which could lead to inaccurate analysis of signals, which erroneously makes the surviving market signals look better. And finally, there is also a risk that a professional trader’s real account is just a demo account, which puts new traders even more at risk.


Market and Offshore Risk

New traders often forget to consider fundamental analysis, which weighs in on the big news such as a central bank’s intervention, war, or political instability, which could cause a massive change in the market’s direction. Another risk new traders should look out for are lawsuits from the Commodity Futures Trading Commission (CTFC) against foreign brokers accepting US residents. In cases like these, new traders should consider diversifying their investments across offshore brokers to mitigate the effects of offshore broker failure.


It depends on your choice of platform and e-broker

Depending on the platform and e-broker, you could encounter the following problems. Your minimum lot size could turn out to be too large, or your maximum open trades could have reached their limit – both situations could cause malfunction on some platforms. Besides, you could also subscribe to a professional trader that trades instruments you can’t trade, which could cause malfunction or result in insufficient hedging of your portfolio. Or your margin call and stop out percentages are too conservative, causing a premature stop out. Lastly, FIFO/hedging restrictions of your e-broker could also cause malfunction or insufficient hedging.


Following a professional trader could be risky

Imagine following a high-performing professional trader, then suddenly, he discontinues his signal without notice, and you don’t have a backup plan. He could also later change to a more aggressive strategy, which means riskier trades for you. The e-broker could also stop him out because of a large drawdown.


It comes with technical risks

Your professional trader’s signal could disconnect because he forgot to renew the signal subscription or pay the monthly fees. Or worse, your online trading platform could suddenly close without restarting. The network servers could also go down during trading hours. Apart from that, Your account could go out of sync with the professional trader’s account without you knowing it. And finally, your trading account could get hacked.


Final Thoughts on Copy Trading

Copy-trading or social trading is NOT for everyone. Risks range from human anomalies and change of behavior to technical errors. It is not a full guarantee that you will make huge profits from the following someone. You will need to be aware of its limitations and take an active approach to manage your trades and risks.



Artificial Intelligence (AI)

AI or intelligence demonstrated by machines has reached new performance levels. The integration of AI further expands the development of trading bots in the industry. Compared to bot trading or copy trading, AI seems to be a clear winner.


Origins of AI in Financial Trading

AI’s formative mathematics originated in the 1900s. Still, it wasn’t until 1986 when K.C Chen from the School of Business at California State University and Ting-peng Liang of the University of Illinois developed a system that predicted an 87 point drop in Dow Jones Industrial Average. Today, AI can analyze millions of data points, execute trades at the optimal price, and help analysts forecast markets with greater accuracy. We see AI and machine learning leveraged in the financial world, continually learning, producing, and refining algorithms and investment strategies for the better.


Advantages and Disadvantages of AI


The Advantages

AI can process big data and learn faster than humans

In the financial market, where vast amounts of data a present, AI and machine learning prove their advantage over humans. AI can make sense of broad datasets that humans would take a long time to process. One such innovation is how Level01’s Fairsense AI does real-time analytics from data provided by Bloomberg and Thomson Reuters (Refinitiv), two of the biggest global providers of financial information.


AI provides accuracy and helps with decision-making

AI can recognize trends and patterns with tremendous precision and execute decisions in seconds. AI can also make future forecasts, helping to guide investment approaches. It is like Level01’s FairSense AI, which provides fair pricing and risk versus reward probabilities (win or lose ratio) for both sides of a trading contract, ensuring optimum balance and fair value pricing among traders.


AI can respond to any market conditions

AI is transforming financial markets because it can read and react immediately to market conditions. The speed at which AI analyses information beats human research and can inform a trader if portfolio tweaks are needed to avoid an investment collapse. For example, in Level01’s FairSense AI, you can view your win or lose ratio in real-time from the moment to create a contract till even after you’ve made a contract. It is an impressive technology that can help traders perform even better in the market.


AI helps eliminate human emotions

While trading bots can also eliminate human emotions, it cannot learn and adapt the trading approach like AI. AI uses big data to make trading decisions and indeed outperforms humans who suffer from emotions such as greed, anger, or the fear of missing out (FOMO).


AI can uncover more patterns than humans

These days some hedge funds use AI to solve 300 million data points on the New York Stock Exchange within the first hour of daily trading alone when it comes to high-frequency trading. Powerful computers help AI process data and uncover patterns faster, even patterns hidden to human investors.


AI is cost-efficient

Machine-learning or AI does not require regular salaries to analyze financial data for you. It runs all the time without needing to rest. Just look at how FairSense AI is performing within your Level01 app on your phone.


AI can analyze and predict sentiment

These days, AI can read and explore news titles, social media comments, blogs, and more to tell you what the public opinion is. It can also predict the direction of the market via this analysis.


AI trades faster than humans

It’s no surprise that AI trades faster than humans. It can even trade without needing to call your broker.


The Disadvantages

Business and Regulatory Risk

Today, most AI applications have “guard rails” – meaning AI does not have the autonomy to choose what to buy and what to sell – and for a good reason, because there could be business and regulatory risk if AI runs unsupervised.


There are insufficient quality data and human resources to run the system

For AI to become more powerful, we need to feed it with sufficient high-quality data to provide and train systems. And for that to happen, we need to have a larger workforce to manage the system. It makes AI very expensive to run and develop.


Final Thoughts On AI

The bottom line is that there are enough cases that demonstrate AI’s potential applications in the financial trading market. It is just a matter of time before the masses will see AI application as commonplace. For now, traders will have to scour for the availability of AI technologies offered by leading exchanges, especially DeFi platforms, to gain that competitive advantage. Level01 is such a platform that has provided AI technology to the masses in its app. Having its proprietary FairSense AI as a feature is a game changer because there are not many platforms that are willing to invest in this technology. After all, it is very costly to develop. However, AI’s returns on investment are worth it, especially for traders of an AI-enabled platform. 


In Conclusion

Out of all the three technologies, AI is the clear winner because it can outperform professional human traders and trading bots in the financial markets. While bot trading is excellent for automating recurring tasks, it is limited in its ability and cannot process information or think for itself. Meanwhile, copy trading feels more personal because you are in touch with a fellow human for an in-person advisory. Still, human beings cannot process big data as fast as AI, nor can humans predict patterns quickly. AI provides you the best of both worlds because it is always learning based on data and will get better over time. Advances in AI can create better financial trading and better lives for everyone.


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