Should you automate trading? Pros and cons

28.08.2025

Education

Aladdin's lamp is the eternal dream of mankind. It is no coincidence that Larry Fink built the BlackRock hedge fund around an AI called Aladdin. Fink's wish came true. His automated system has made him one of the most influential people in the world over the 37 years of its existence. The largest banks, funds, the Federal Reserve System and the US government consult with him.

This example is inspiring. But there were also failures. Another fund operated in parallel with BlackRock. It was even more famous. It was founded by John Merryweather. And the team of developers included two Nobel laureates in economics, Myron Scholes and Robert Merton.

The fund was called Long-Term Capital Management (LTCM). During its activity from 1994 to 1997, it showed an average annual return of 40.0%. Phenomenal for its size. But in September 1998, LTCM almost collapsed. The Federal Reserve saved him. To avoid a systemic crisis, the American regulator had to allocate $3.65 billion.

Both funds were there at the dawn of algorithmic trading in the 1990s. But their opposite fates make it clear that automation itself is not a panacea. It is a powerful tool. It can lift you to the top. And throw you to the very bottom. The LTCM fund was liquidated in 2000. And its team was never able to wash away the shame.

Advantages of automation

The ideal of automated trading is an autonomous robot. AI. It should:

trade around the clock,
without errors in the prescribed algorithm,
constantly check its effectiveness,
analyze the maximum number of instruments,
control risk.

If all conditions are met, with a positive trading strategy, the robot will make a profit. And the trader, at this time, will enjoy life. Theoretically, this can be achieved. But reality always finds more and more new vulnerabilities.

Disadvantages of automation

The main advantages of automation are that the robot is devoid of human vulnerabilities. Paradoxically, the main disadvantages of such systems are related to the same feature:

most robots lack adaptability,
development and optimization require a high level of cross-knowledge in trading and programming,
automated systems are highly vulnerable to technical failures,
most robots cannot detect their incorrect operation and stop.

Even one disadvantage is enough for a trader to be tied to his workplace. Aladdin's lamp remains a dream for almost everyone. You can try to eliminate the shortcomings. But the level of complexity will grow exponentially. This will pay off only with large capital. And large capital will still not allow you to move away from the monitor.

Practical conclusions for a prop trader

24-hour trading is attractive as a bright slogan. The trader sleeps - the robot makes a profit. But there is not much time during the day when volatility is high enough for successful trading.

Only in these limited periods, day trading strategies, which are what prop traders specialize in, provide an acceptable ratio of profit and potential loss.

In fact, we are talking about the first hours of the European and American trading sessions. The rest of the time, the markets are calm. These 4 hours are golden for a prop trader. It is reasonable to use a robot for day trading only here. It will save you pressing several keys.

The rest of the time, there will be a lot of false movements. Theoretically, you can use a scalping robot. But scalping itself implies high activity. And with its automation, the activity can reach an extreme level. Prop companies are unlikely to accept such high risks. They simply will not be able to control them.

It turns out to be a rather interesting conclusion. Autonomous robots are not suitable for prop trading or independent trading due to their low level. Automation is interesting here only as a tool for reducing routine:

primary search for trading signals,
copying trades, if allowed,
risk calculation, etc.

And if we talk about full autonomy of trading robots, a team of high-level developers and large capital are needed. In this case, we should talk about creating our own AI, like Aladdin. Even banks cannot afford this. For retail traders, this is a prospect for the distant future.

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