|Trading systems||Disadvantages of trading system|
We've looked at the main advantages of working with a trading system, but the approach also has its drawbacks.
• Trading systems are complex - This is their biggest drawback. In the developmental stages, trading systems demand a solid understanding of technical analysis, the ability to make empirical decisions and a thorough knowledge of how parameters work. But even if you are not developing your own trading system, it's important to be familiar with the parameters that make up the one you are using. Acquiring all of these skills can be a challenge.
• You must be able to make realistic assumptions and effectively employ the system - System traders must make realistic assumptions
about transaction costs. These will consist of more than commission costs
- the difference between the execution price and the fill price is a part of transaction costs. Bear in mind, it is often impossible to test systems accurately, causing a degree of uncertainty when bringing the system live. Problems that occur when simulated results differ greatly from actual results are known as "slippage". Effectively dealing with slippage can be a major roadblock to deploying a successful system.
• Development can be a time-consuming task - A lot of time can go into developing a trading system to get it running and working properly. Devising a system concept and putting it into practice involves plenty of testing, which takes a while. Historical backtesting takes a few minutes; however, back testing alone is not sufficient. Systems must also be paper traded in real time in order to ensure reliability. Finally, slippage may cause traders to make several revisions to their systems even after deployment.
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