The Rise of Automated Trading Platforms and the Need for Security
Several decades ago, algorithmic trading was just a new fad that took over the world of finance. Only wealthy investors and huge financial institutions could afford running such systems as they required dedicated servers and direct connection to exchanges. The internet changed everything. Now, all participants of the market were suddenly connected to each other.
As more developers and businesses gained access to the global financial infrastructure, new products started popping out here and there. Many of them were various automation instruments that are quite normalized and standardized today.
Modern automated trading platforms are quite diverse. Some of them are extensions of centralized exchanges and brokerage service providers. Some deliver a standalone product with a clear focus on hands-off automation. Companies like WunderTrading try to deliver complex multidimensional products capable of catering to every need of an investor.
Why did automation vendor rise to such highs in the 2010s? Here are some reasons:
- Convenient experience. Setting up an automated trading system back in the 1980s required a level of technological expertise and capital not available to the absolute majority of retail traders and regular investors. Today, you don’t need to learn how to code or invest hundreds of thousands of dollars in a dedicated server room. Modern automation platforms are easy-to-use and quite affordable.
- Outstanding results. When a good technical analysis strategy powers an ATS, the consistency reaches new heights. While experienced investors and fund managers still outperform automated trading systems, contemporary bots can do just as well or better than average human traders. It means that even novices can enter the market without any issues.
- Working around the clock. One of the biggest reasons why bots usually perform better than humans is that they don’t need to sleep, rest, or go to eat. They stay active 24/7 and can act on opportunities that often elude people as they cannot work efficiently for more than 12 hours per day.
The expansion of the sector also played a huge role. During the era of rapid growth of the Forex industry, the product of automation started taking shape. However, it was refined and reached a completely new form in the 2010s when the cryptocurrency market became the new hottest destination for new-age investors. The influx of people who wanted to make money in the lucrative crypto ecosystem brought in a new threat — a cyber-threat.
Secure investing is a something that has been discussed since the conception of the idea of money itself. However, the talks usually revolved around the reputability of the middlemen, safety of custodial institutions, and other such factors. The internet created a whole new set of problems for financiers. A modern retail trader has to worry about many more issues including cyber security, personal data exposure, digital asset protection, and more.
The concept of online investment security is quite large and cannot be vivisected as thoroughly as necessary within the confines of a single article. Instead, we want to talk about protecting your portfolio when you are using automation.
The Importance of Choosing a Reputable and Secure Automated Trading Platform
The most obvious vulnerability for all bot users is the automation vendor. It is important to employ only reputable automated trading software provided by a company that cares about cyber security and has safety features like two-factor authentication, user verification, and various methods of protecting user data.
It is imperative to work with a company that takes security issues seriously because they will need to receive access to your exchange accounts via API connection. It means that an automation platform will have total control over your portfolio and will be able to place orders on the spot market making it easier for some bad actors to redirect your funds in their hand or use them to manipulate the market.
When it comes to searching for secure investment opportunities, you need to do your own research and look at track records of companies that you intend to work with. A trusted investment platform should have good user reviews, provide a concise explanation of its security features, and be as transparent as possible without compromising its own safety.
Here are several things to look for:
- Two-factor authentication is quite important for any modern online business. However, it is imperative for an institution in the financial sector.
- Safe connection. Encryption protocols that protect communication between you and the platform is another critical safety factor.
- Technological superiority. Secure data storage, protected cloud servers, and advanced cryptography are contemporary staples used by reliable fintech companies.
Conduct Thorough Research on the Platform's Security Measures
Each of platform security features that you should be looking for when evaluating potential investment opportunities and service providers must be scrutinized. Let’s talk about each point in a little bit more detail:
- Two-factor authentication. 2FA is a common practice employed by most web applications. It is a good way of providing another layer of protection to communication between parties. While using your mobile phone number to receive SMS is the best known way of doing 2FA, there are other methods that may appear slightly more effective at preventing unauthorized access to your credentials and personal information. Google, Yahoo, Microsoft, and some other tech giants offer their own applications that can be used to verify ones credentials. There are also unique solutions in the crypto industry.
- Encryption protocols. Whenever you access data or connect to a website, you should be looking for an SSL certificate and other protocols that protect communication and ensure that leaks do not happen. When data is sent over the internet without any encryption, it is quite easy to intercept, modify, or simply steal it. Using SSL-encryption and other similar ways of protection the data itself is a common practice. If you stumble upon a website that does not have any ways of protecting your data, it is not a good idea to browse it.
- Secure data storage. Time has proven many times that trusting a startup or an inexperienced in a new field company with your data is quite dangerous. Many modern businesses prefer outsourcing data handling to cloud service providers like Amazon Web Services or Microsoft Azure. If your service provider does not use these established instruments or their analogs, you will need a high level of technical expertise to do your own research and evaluate the quality of cyber protection used to store user data.
Check for Regulatory Compliance and Licensing
The cryptocurrency industry is unregulated and will likely stay this way for a long while despite the best efforts from the US government. On the other hand, many centralized exchanges and brokerage service providers in Europe and Asia do not shy away from receiving licenses and other necessary documentation to conduct their business in accordance with local and international law.
The regulatory authority oversight is quite important for an individual retail trader. People need protection from institutions which was demonstrated by the collapse of Terra Luna and FTX. While these are isolated instances of bad behavior from incompetent or fraudulent people, there is no guarantee that another such collapse won’t hit the market. Clients of FTX and owners of $LUNA tokens lost millions of US dollars and had no legal recourse because of the lack of regulation.
You should work only with exchanges that have licenses and comply with regulatory rules imposed by authorities. Regulated trading platforms exist and allow their clients to work with less anxiety. We strongly recommend working only with licensed investment platforms.
Look for Transparent Privacy Policies and Data Protection Practices
Many companies that are registered in the EU have to abide by rules of General Data Protection Regulation. GDPR compliance is a great thing as it guarantees certain levels of privacy and user information safety.
Safeguarding Your Personal Information and Account Credentials
While some responsibility for the safety of user data falls on the shoulders of companies providing services and using said data, the biggest burden is on users themselves. A retail trader who wants to use a wide range of various services should be ready to employ as many safety measures as possible.
Here are some account security tips that you could and should follow:
- Never disclose your credentials to anyone. It is a common practice among all companies to warn their users that employees never ask for passwords and other sensitive information. You should never give away any personal data willingly without proper confirmation of the intentions of the party inquiring about the data.
- Use the best practices of password protection. Do not type your password in open text in chats or even documents that you believe are safely stored. It is a good idea to memorize all your passwords instead of using various managers since they also may have vulnerabilities. Use a strong password that has different symbols, numbers, and spaces (if they are allowed).
- Multi-factor authentication. We have already covered this topic, but it is never a bad idea to reiterate something important. If a platform you are using allows for multiple methods of authentication, choose several. SMS-verification, e-mail codes, and other means of securing access to accounts must be used by every retail trader!
The Role of Risk Management Strategies in Protecting Your Investments
Another important topic closely related to asset protection is risk management. While it is not something that can be affected by outside influence, it is still something that may completely ruin your portfolio.
Here are some risk management techniques that you may employ to protect your assets:
- Use delayed orders. Take-Profit and Stop-Loss orders are excellent tools to prevent losses and secure profits. When you are using automation, delayed orders should be used for each market position to ensure that you won’t lose too much. Even the best technical analysis will produce false positives regularly. You need to safeguard your portfolio from such mishaps.
- Employ diversification strategies. Investing money in different asset classes is a commonly used approach in the world of finance. However, you can further diversify within a chosen asset class or investment type. For example, automation allows you to engage in copy trading and follow traders with different risk styles and approaches to trading. You can also run DCA bots with conservative settings to reduce risks.
- Choose an appropriate risk style. A large portfolio can sustain some losses and allows traders to run a risky strategy for a relatively long time if they have high hopes for their forecasts. On the other hand, individual retail traders with a limited capital should never overreach or use leveraged positions without proper justification. Adjusting your risk style according to preferences and circumstances is a good idea for all investors.
Vigilance Against Phishing Attacks and Scams Targeting Automated Trading Users
Many people become victims of phishing attacks. They happen less frequently in the automation industry, but can occur and deal some serious damage to your assets. It is necessary to stay vigilant at all times and look for potential threats while browsing emails, receiving messages on social media and even through live chats on seemingly reliable websites.
Here are some phishing prevention tips:
- Do not open emails from unknown addresses even if they appear familiar. The most common tactic employed by scammers is to use an email address very similar to well-known companies. For example, a hacker may use an e-mail address “[email protected]” with two letters a instead of just “wundertrading”. Someone who does not look carefully may open such letter and click a link that will lead them to a fake website.
- Staying vigilant online. You may receive a message from an old friend asking for some help or a push-notification from an app on your phone. These can be used as infiltration points by scammers. It is important to check every single incoming message and verify its origins before answering or even opening it.
- Do not use unknown hardware. Some hackers will use USB-sticks or cheap phones to gain access to your Wi-Fi network, hard drives, or operating system. Using an unfamiliar device on your main PC or laptop is never a good idea. Use it on public machines like personal computers in libraries, laptops that do not carry any sensitive information, etc.
Recognizing scam attempts may seem to be an easy task, but you should never let your guard down!
Educating Yourself on the Best Cybersecurity Practices for Investors
There is never enough expertise or acquired knowledge about online safety. As protection measures and systems improve, so do tricks employed by hackers. Another big problem is social engineering that relies on lapses of human judgment instead of downfalls of technology. Since humans are susceptible to deception, it is a good idea to try staying updated on the latest threats.
We strongly recommend reading more about ways to protect your assets in the world of crypto. Use hardware wallets, learn more about various ways of storing your tokens and visit cybersecurity resources for traders like forums and dedicated subreddits. Due to the complexity of the World Wide Web, cybersecurity education for investors is a top priority area for any retail trader!
Prioritizing Security in Your Automated Trading Journey
The excitement of using your first bot can be overwhelming and make you overzealous to start trading without implementing basic asset protection strategies. However, safety should be among your biggest priorities. Secure investing mindset is what separates successful retail traders from people who lose everything on a technicality.
When it comes to using automation, you should be focusing on protecting all points of vulnerability by creating strong passwords, employing multi-factor authentication, verifying sources of messages and emails carefully, and staying alert. These things will give you the peace of mind in automated trading!