Automation tools for conducting trading on financial markets have existed for many years and have become quite popular with retail investors around the world. At first glance, such tools offer investors an advantage in finding price movements or patterns to earn a profit, but the use of such trading tools often comes with increased risks for the investor.
Such 3rd party automated trading tools are often referred to as robots, advisors, algorithms and the like. Popular trading platforms, such as MetaTrader have entire communities of traders and programmers who build so-called Expert Advisors – software that runs on the trading platform and conducts automated price analysis and trading.
Other broker platforms may have similar software that works on top of the existing platform infrastructure to help investors automate their trading strategies and market analysis.
Both novice and experienced traders need to keep in mind that using such trading tools can present additional risks for investors apart from possible losses incurred while trading. We cover some of these risks below.
- Not all 3rd party trading tools are created equal
Traders should carefully consider the methodology used by trading tools that are offered by brokers or 3rd parties to make sure they align with the investor’s trading goals, risk appetite and frequency of trading. For example, you should carefully study how the trading tool you want to use analyzes market data, finds trade scenarios and how it executes orders on your behalf on the trading platform. The latter is especially important in order to understand when and how the trading tool will be conducting trades for the user in a live environment. It is important to understand these details in order to analyze the amount of risk a trader is willing to tolerate when using 3rd party trading tools. Furthermore, the trader is responsible for understanding any settings or set up instructions required for the trading tools prior to using them in a live market.
- Trading results achieved by 3rd party tools are the sole responsibility of the investor
Traders must also understand that any profits or, more importantly, losses incurred on their account while using 3rd party trading tools are their sole responsibility. Most brokers will include clauses in the agreements governing retail client accounts absolving them of any legal responsibilities for trades or analysis conducted using such tools. Before beginning to use a 3rd party trading tool, carefully consider your risk appetite and the funds you are willing to lose, should the trading tool not work in your favour.
- Disputes involving losses incurred from the use of 3rd party trading tools
Investors must understand that the resolution of disputes involving losses incurred from the use of automated trading tools often rests on the legally binding agreements between traders and their brokers. As mentioned above, such agreements almost always indicate that any trading results achieved using such tools are the responsibility of the trader.
Furthermore, according to the Financial Commission’s Rules & Guidelines, such disputes may be rejected by the organization, in cases where losses incurred by the trader were the result of using tools provided by 3rd party companies or trader communities and not directly by a broker member of the Financial Commission.
Given all these factors, traders must carefully consider if any 3rd party trading tools or software align with their trading strategy given the risks described above and the low probability of achieving success in any type of dispute that may arise from such automated trading.