Disadvantages of Using Trading Systems

Trading systems are convenient tools for optimizing your stocks or foreign exchange trading for profits.  These systems are automated and designed to generate signals and perform actual trades with obvious benefits accruing to the trader using the system.

While they may have their obvious benefits and advantages, trading systems are not perfect and possess some inherent disadvantages.

Trading Systems and Methods (Wiley Trading)

Simulated or Actual Results

The biggest disadvantage so far of a trading system is that these are rather complicated animals. Creating a trading system requires a solid knowledge of technical analysis, the  ability to decide empirically, or a comprehensive understanding of the functions of trade parameters on which they are based.  While you may not be involved in the development of the system, familiarization with trading parameters can be equally challenging.

In order for a trading system to become effective, you need to have knowledge of how to differentiate simulated from actual results. This is known as “slippage” and represents one of the major pitfalls in the effectiveness of a trading system.

Time Consuming

The task of developing your own trading system is time consuming. Getting it to run and work effectively requires that you have tested it for some time. You also need to do a paper trade in real time to ensure that your system is reliable. The factor of slippage may also come into play, which will eventually require you to completely revise your trading system.

As has been mentioned earlier, you need to be careful when choosing a trading system. There are firms that are out to get your money and offer a system that does not work.  A trading system can indeed be a useful and convenient tool to novice traders who wants to succeed and make a living out of stock or foreign exchange trading. But you need to really choose wisely.

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