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Robot trading software scams: can they be avoided?

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  • Robot trading software has many advantages due to the way in which it automates various aspects of online trading in many different markets.
  • Allowing traders to establish specific rules for both trade entries and exits that are then executed without further input, these systems are so popular it is estimated 75% of shares traded on US stock exchanges are the result of their use.
  • However, as with many other beneficial systems, there is plenty of scope for scammers to use them in malicious ways.

What is robot trading software?

The growth over recent years of automated trading systems, often called ‘robot’ trading, has led to undeniable benefits for many traders who use them safely and successfully. Based on algorithms, which allow investors to set out their own ‘rules’ for entering and exiting a position, the programs can be left to their own devices to execute trades.

This can be a great tool for those with time restraints, and the ongoing monitoring of the market positions is done ‘on the fly’, allowing a ‘hands-off’ style to be used with little detriment against other traders, who may be used to a more intensive, all-hours input approach.

Using simple signifiers such as a moving average crossover, the use of robot systems can also help take the ’emotion’ out of trading, as moves are made only when predetermined criteria are met.

The relatively recent growth of these systems is due to several factors, the main one being the ease of online connectivity to direct access brokers. The other being the general trend towards using automated and AI processes.

However, as with any other ‘system’, this offers traders no perfect investment strategy or a guarantee of success. In fact, there are also plenty of opportunities for scammers to take advantage of the concept to commit acts of fraud.

Robot scams and how to avoid them

Untested and unverified systems obviously have the potential to make trades incorrectly. Unscrupulous companies could even programme their software with a deliberate bias that affects outcomes negatively for traders. The old adage of ‘if it sounds too good to be true, it probably is’ should always be kept in mind when assessing robot software for potential use. Any system that offers high profits for a low price should always be approached with caution.

New scams are often based on old tried and tested models that are simply reapplied to a new system or technology. The idea that automatic trades can be generated that earn money while the trader is asleep is a con as old as the markets themselves. So, examining closely what is on offer and doing in-depth research is key to avoiding fraudulent robot schemes.

If a system has been submitted for formal review and tested by an independent source, that is undoubtedly a good sign. However, even these kinds of reference can be faked or cloned from other reputable systems, so also look to the source of information rather than just take something posted on a company website at face value.

Testing a trading system’s parameters is essential too, as an incorrect set-up will generate random buy and sell signals that will cost unsuspecting traders money. On the question of cost itself, automated trading systems are not new; it’s just that in the past they have been very expensive to use and that has put them out of reach of most traders. Today the situation is quite different, and exorbitant prices that cannot be justified by a record of exceptional results is actually a red flag in itself.

Co-mingling of funds is another trick that fraudsters can use. This means that individual investors are unable to keep track of the exact performance of their own investments and can allow unscrupulous companies to take advantage by way of high outgoings that end up coming out of their clients’ pockets. Of course, co-mingling isn’t always a sign that fraud is being perpetrated and the only thing that a trader can really do to reduce the risk in this area is to ensure that they are using a reputable broker.

Other warning signs that a particular robot trading scheme might not be legitimate are similar to many other potential frauds. If a broker won’t allow withdrawal of funds, if communication is slow or non-existent and if trading problems occur regularly, these are all red lights that need to be taken into consideration.

The usual rules for ‘due diligence’ and careful investing can help traders separate the good systems from the bad or the scams. Asking questions before making an investment is crucial and researching the company and its team is a necessity. Checking out impartial third-party assessments and testimonials is common sense and choosing a system or platform that offers a no-commitment trial period is always a good idea.

Conclusion

Robot trading systems can be highly beneficial for traders with some experience and who are able to commit some initial time to doing their own research and fact-checking. They are not a magic bullet that a novice trader can utilise to simply make money on their behalf.

As more legislation comes in to keep up with the latest tech and deter scammers and criminals, it is creating a safer trading environment. However, new scams are emerging all the time, and ultimately, it is down to the individuals themselves to make sure they are protected as much as possible when trading the markets by whichever means they choose.