Updated: Dec 15, 2021
Automated Trading Solutions, or trading "bots" are transforming the way people generate passive income.
With little to no training, anyone can "trade" the worlds largest financial markets. But should they?
The entry point is low, and entertainment value high, as investors watch trades being placed, on their behalf through software portals, in real time. It can be as adictive as gambling. Profits (and losses) can be instant, and significant.
As a result, these trading robots and automated trading platforms are growing in popularity.
With an ageing population, and global economic uncertainty, many people are wondering just how they'll survive, let alone thrive in retirement.
If current governmental trends continue, spending on aged care will reduce to a level that may create second class citizens out of the millions of people that have lived their life with the belief that their government will sustain them in retirement, with a host of benefits and free health care. They have often saved, but seldom enough.
According to Sanlam - "When asked, the average retirement income people feel they need in order to attain their goals is £34,000 a year. But at today’s rates, you would need to have saved up an almost £1 million pension to be able to achieve that figure ...... In reality, the average UK adult has a target pension pot of £355,000, which equates to an estimated annual income of £13,000—some £20,000 below their desired income. Currently, the average net income of a retired person in the UK is only £15,080 per year."
Given that's the picture today, and the trend for governments is reducing aged assistance, while raising taxes such as those providing for council tax, death duty, income tax on investments, capital gains tax on property etc.. it doesn't look good for your average 50 year old.
It's no wonder then why so many are looking to increase their savings and pension pot, while planing for retirement by adding a passive income stream to cover the gap between what their current investments can provide, and what they will need to simply maintain their current standard of living in retirement.
As the returns from traditional forms of passive income such as property portfolios, share dividends and fixed rate interest are simply too low to cover this gap, and require significant capital at risk, alternate means must be sought.
Automating trading techniques, through the use of advanced AI (Artificial Intelligence) and complex, pre-defined algorithms, is one way some people are finding their feet again.
In 2020, 10% of hedge funds in Europe and the United States employed algorithms to trade over 80% of their worth. - analyzingalpha.
Unlike the traditional forms of investment above, a combination of high frequency trading, and leverage, means that automated trading solutions require a relatively small investment in technology, and trading funds for the average investor.
Depending on the specific trading solution, and risk level you're prepared to accept, returns can be anywhere from 1-2%, and up to 8-12% per month for a capital risk of between £25,000 and £100,000.
The higher value the "pot" or trading account that your automated trading solution has to utilise, the more currency return you could expect, although the percentages of return tend not to increase over around £100,000 invested.
At the extreme lower end of risk, a higher capital amount is required. For example, to generate around £15,000 a year, at the lowest risk settings, you would probably need closer to £100,000 in the brokerage account. Increasing to medium risk levels could see the same income generated from as little as £50,000 held on account.
The average UK house will cost £325,000 today, and will bring an average gross rental return of around just 4% per annum, or £13,000.
After you deduct costs from your buy to let though, such as insurance, depreciation, maintenance, vacancy etc.. Then add the risks of tenant issues and property damage, it's easy to see that it would take a significant property portfolio, and a bit of courage, to generate anything near the income needed to retire.
What seems attractive to a new generation of passive income seekers, with an appetite for a little risk, is the flexibility that Automated Trading Solutions could provide.
Unlike the traditional investment options above, (such as property and term deposits), the automated trading funds are totally liquid and any cash held on account is accessible at any time.
In some cases, profits can be withdrawn weekly, or even daily. The investor decides the risk level and can monitor performance in real time. Once confidence is gained, the machines can be left to do their thing.
Many new Automated Trading Solutions target a return of investment within 12 months.
This means the investor should have their initial risk capital returned within 12 months, by way of trading profits. After which, the trading solution they have chosen is self funded and arguably "zero risk" (given it’s trading in profits generated from the capital it has now returned to you).
While we were all becoming comfortable with iPhones, robotic vacuums and self drive cars, financial markets, the trading techniques they allow, and potential returns have also come a long way.
Twenty years ago, automated trading was limited (and there were no iPhones). It was technology that only high street banks could utilise, with their multi-million dollar computer systems. They employed complicated algorithms, and teams of analysts to watch market conditions and execute trades.
There are now millions of Automated Trading Solutions available offering more "power to the people" than ever before.
As a result, the worldwide algorithmic trading market is predicted to rise from £8.25 billion in 2019 to £13.9 billion by 2024.
The requirement for timely, dependable, and effective order execution is going to drive the rise. Reduced transaction costs, tightened government restrictions, and greater demand for market surveillance are only a few of the key drivers of the Automated Trading sector's expansion.
So, are robots the "answer" for my retirement income?
Maybe. They are certainly worth considering as part of a combined approach to a complex challenge, and a balanced portfolio. The population is ageing. How then do we feed them, or allow them to feed themselves?
Is trading forex the only automated trading option I have?
No. Advancements in Automated Trading Solutions have meant that a much broader offering is now available.
It's safe to say that arguably this advancement was created, or driven, by the need for decisions made in micro seconds trading foreign exchange, however, the same automation, and many of the same algorithms, can be applied now to anything from gold and silver trading, traditional equities through to crypto and horse racing.
What about crypto trading and mining?
Passive investing involves creating the appropriate conditions to optimise your returns, while not actively managing them.
As a result, given the growth in capital value, and popularity, cryptocurrencies can be another innovative instrument for investors wishing to invest small amounts of money, while hoping for large returns over time.
Risks are still considered high with regards to Cryptocurrency investing, however, there are numerous stories of people investing £1000 and after 3-4 years, collecting millions. Obviously this is far from guaranteed and perhaps the adage "don't invest money you can't afford to lose" applies most strongly here.
The table below summarises the top 5 Crypto currencies and what would have happened if you purchased just $1000 worth of each 5 years ago, in 2017.
Worth a punt?
Thankfully, trading robots can now even select which cryptocurrencies to buy or sell. With crypto as a potential income, there is the added benefit of being able to "create" wealth by mining it yourself. If that sounds far too hard though, you could take a look at investing in a Crypto Mine Fund to share the risk (a managed fund which invests solely in physical crypto mining operations) like those provided by Squarely Funds.
What was once a technological theory is now an economic reality.
"Till date, there are 87,560 permanent opportunities in the UK that demand process and technique expertise such as algorithmic trading. GBP 90,000 is the median annual salary for jobs citing algo trading in the UK." - analyzingalpha.
Some very smart people are working very hard to make trading, and passive income generation an economic reality, (and getting paid very well to do it).
Automated Trading is here to stay, and no longer the refuge of city fund managers making 10% a month on trading your money, while paying out 3% a year.
Key Automated Trading Strategy Characteristics
It's important to consider the key characteristics of any automated systems before committing.
Which Automated Trading Strategy?
A robot's trading strategy is built into its coding, how it behaves (or mis-behaves) is pre-defined. Depending on its goal, the algorithm may trade frequently or infrequently, in varying "lot" (amount per trade) sizes. The better (and more expensive) Automated Trading Strategies (robots) will be regularly maintained, or updated either by the developer (supplier), or, in more recent examples, through AI (Artificial intelligence and Computer Learning).
Some robots include several indications that must be added to the charts. Traders automate their strategy by creating indicators and then using expert advisers to interpret the signals and automate the execution (buying and selling).
Grid and martingale robots are now popular among retail traders. While these algorithms produce a smooth balance curve, abrupt declines in equity may result in margin calls. It is important to make sure the risk level of the automation matches your taste for profit or loss.
The level of equity in your trading account, and the strategy you choose, can be directly proportionate to potential profits. Foreign Exchange trading often uses "leverage".
This can mean that a low balance in your trading account (say £10,000), with high leverage/risk, could leave your account facing a margin call or loss of total equity (your money is lost) if the currency you hold drops in value. Whereas the same account, with the same risk settings and £100,000 would have enough equity to enjoy the "swings" of the major currencies. Effectively, this means that you have enough room in your account to suffer a short term loss, before a swing ultimately results in a "closed profit".
When your account gets funded and "goes live" the software will buy the currencies that it's algorithms decide, based on potential market movement and probability of profit. A little like buying stock for a shop from a business overdraft. This is not a loss, even if it shows as negative, until of course you sell the stock for either more than you paid for it (profit), or a less (loss).
Automated trading solutions work the same way. They buy stock for you, and trade it, dipping in and out of your trading account (overdraft).
Often the trade can seem negative (shown in red on your screen), before swinging back to positive and being sold (closed) off. The more equity you have, the longer the software can wait for it to swing back to make you a profit.
Just how the Automated Trading Solution does this, how often, and for how long are all key factors in its success, or failure.
What level of automation?
Some robots are fully automated, which means they do not require manual intervention and can operate without the assistance of a trader. These fully automated trading solutions are favoured by most retail investors and those with no experience of trading, or the market these "bots" trade in. It's this automation which ultimately offers the passive income people seek.
An investor simply needs to choose a trading solution which matches their preference for risk and return. Then sit back and "relax".
Other, semi-automated "bots" can require minimal input from a user who often follows "signals" from more experienced traders to set (and forget) the trading day parameters before it commences each day. They can offer more control, however, are not for the faint-hearted and is then ultimately no longer a "passive" income.
What about learning to trade myself?
Trading can be a great hobby, a lucrative career, or a complete disaster. At the very least, you should undergo considerable training, and practice with "demo accounts" (fake money) until you are consistently profitable.
Then, and only then, consider trading with very small amounts of money you can afford to loose. As you almost certainly will, at least at first.
This form of investing is often referred to as "day trading." A key benefit of Day Trading is that as long as you are mentally astute, you can trade well past retirement, effectively securing a "later-life income".
That said, many people who embark on this path eventually discover why there is a growing demand for Automated Trading Solutions. Some reasons for this demand are below.
Psychology - Robots are not influenced by ordinary human emotions such as greed, fatigue, addiction, fear, etc. that can significantly impact traditional trading. They can trade with complete consistency and follow a strict game plan.
Manual intervention - As most solutions do not require manual intervention, traders can rest while the expert advisor does all the heavy lifting.
Mathematics - Trading robots can solve hundreds of complicated mathematical problems each second. Investment, and trading especially, if nothing else is all about maths!
Experience - A trading robot can be used by anyone with little to no trading experience. Many are programmed by experts in the field, and advancements in AI (Artificial Intelligence) mean they can adapt and learn over time.
So, what next?
We should always approach passive investments carefully. By definition they are managed by someone, or something else.
Nevertheless, there aren't many 96 year old bricklayers (or brain surgeons) so we all have to face the fact that at some point, if we want to maintain our current standard of living, it must be paid for passively.
Who knows, we may see interest rates rise to the mid 20's in which case, your £100,000 in bonds could provide you with a little comfort. It may be a little reckless to bet on that though.
Seeking a passive income early enough and refining the process while you're still earning could be a good idea.
It's easier to lose money when we know it will be replaced. There has never been an investor that gets it right every time so expect the journey to come with the odd pot hole, or road block.
Looking at options to add to your existing investment strategies in your 40's or 50's will give you enough time to play around and get it right, or, if you are lucky, to build up a great flow from the ones you choose early on to work for you.
If you're later in life, consider small investments (in terms of your total assets) and perhaps try different fields. This is the age group perhaps most attracted to Automated trading strategies. They own a house, have savings and a retirement pot. They may be "asset rich" but cash flow poor (especially when they retire).
The low entry point to Automated Trading (perhaps less than 1-2% of their net worth), combined with the novelty of instant access to profits, and the ability to watch their automated trading in real time, can prove very attractive.
Always assess the risks cold-headedly though. You should never invest, or buy an asset, simply because you've heard about it at the pub, or because of its "hype."
Obviously, once again, never invest money in anything that you are not in a position to lose, and remember that the value of investments can go down as well as up.
We offer this article in response to questions from clients. It should not be considered as financial advice, tailored or otherwise. If you have any thoughts or suggestions for generating passive income, I'd love to hear from you.