Interpretation of news releases and market sentiment Automayed it is possible to implement rules in your automated strategy for news trading, analyzing fundamental data can still be challenging for automated systems.
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Often, it is not the aktomated number of the specific news futues that is causing a market to move, but how traders and investors perceive and interpret these numbers. This also holds true for the overall market sentiment. In an trafing bullish environment, bearish news will be treated much differently than when markets are in bearish mood. Market sentiment and its subjective nature can, therefore, pose challenges for automated trading strategies. Although there are ways to stop an algorithm from trading prior or after news, the impacts of fundamental data usually echoes indefinitely, which represents an influencing factor that is very hard to control. Black and white thinking This point ties in with the two previously discussed elements.
Automated trading strategies are limited in the way they process information, and since their actions depend on algorithmic code, they are following exact instructions without the ability to interpret a situation. In trading, however, patterns rarely look identical.
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An automated trading strategy autonated, therefore, easily miss promising trading opportunities by failing to analyze the whole picture. As you will see in the following point, some trading concepts are more bound by this limitation. Subjectivity of trading tools and contextual information Depending on the tools and indicators a trader chooses for his automated strategy, he can run into problems that are not obvious at first glance. Whereas some trading concepts are more cut out to be used for automatization, other trading tools are more subjective and require individual interpretation.
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While a moving average cross-over, a MACD divergence or a cross of the Stochastics is uniquely defined, trzding, support and resistance, price patterns or formations and other price concepts automaated have a lot of room for interpretation. Is a penetration trxding a moving average or a support and resistance line by a few points really meaningful in a high volatility market? How do you deal with different sizes and shapes of pinbars and other candlestick formations under different market conditions, market phases and volatility environments? How do you evaluate the position of certain signals under varying conditions? It becomes obvious rather fast that choosing the correct trading tools and interpreting them in a reasonable way is a very important concept when creating an automated trading system.
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Black swans These rare occasions when markets suddenly move hundreds and even thousands of points are not only a great challenge for discretionary traders, but automated trading systems often perform even worse during such market shocks. It is possible that you lose a significant portion, or even your whole trading account during such events when your automated trading strategy misinterprets the situation. Simply follow our comprehensive user guide. If you encounter any issues, we will assist you remotely over screen share.
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