Automated Trading

What is an automated trading system?

Automated trading systems, also known as mechanical trading systems, algorithmic trading, automated trading or trading system, allow traders to establish specific rules for the entry and exit of trades which, once scheduled, can be performed automatically via a computer. various platforms report that 70-80% or more of the stocks traded on the US stock exchanges come from automated trading systems.

Traders and investors can turn precise rules of entry, exit and handling of money into automated trading systems that allow computers to execute and monitor trades. One of the main attractions of strategy automation is that it can take some of the excitement out of trading, as trades are automatically placed once certain criteria are met.

Trade entry and exit rules can be based on simple conditions such as a moving average crossover or they can be complicated strategies that require a deep understanding of the platform-specific programming language user’s trading. They can also rely on the expertise of a qualified programmer.

Automated trading systems generally require the use of software connected to a direct access broker and all specific rules must be written in the proprietary language of that platform. The TradeStation platform, for example, uses the Easy Language programming language. On the other hand, the NinjaTrader platform uses NinjaScript. The figure below shows an example of an automated strategy that triggered three trades during a trading session.

Making Trading "Rules"

Some trading platforms have strategy creation “wizards” that allow users to make selections from a list of commonly available technical indicators to create a set of rules that can be used. automatically exchanged. The user could, for example, determine that a long position will be entered once the 50-day moving average exceeds the 200-day moving average on a five-minute chart of a particular trading instrument. Users can also enter the type of order (market or limit, for example) and when the trade will be triggered (for example, when the bar closes or the next bar opens), or use the platform’s predefined entries.

However, many traders choose to program their custom indicators and strategies. They will often work closely with the programmer to develop the system. While this usually requires more effort than using the Platform Assistant, it allows for a much higher degree of flexibility and the results can be more rewarding. Like anything else in the world of trading, unfortunately, there is no perfect investment strategy that guarantees success.

Once the rules are established, the computer can monitor the markets for buying or selling opportunities depending on the specifics of the trading strategy. According to the specific rules, as soon as a trade is entered, all protective stop orders, trailing stops and profit targets will be generated automatically. In fast-moving markets, this instant order entry can mean the difference between a small loss and a catastrophic loss if the trade moves against the trader.

Advantages of Automated Systems

There is a long list of benefits of having a computer that monitors the markets for trading opportunities and executes trades, including:

Automated Trading Systems Minimizing Emotions During the trading process. By controlling their emotions, traders usually have more time to stick to the plan. Since trade orders are automatically executed once trade rules have been followed, traders will not be able to hesitate or question the trade. As well as helping traders who are afraid of “pulling the trigger”, automated trading can hold back those who are inclined to over-trade, buying and selling at every perceived opportunity.

Backtesting applies trading rules to historical market data to determine the viability of the idea. When designing an automated trading system, all the rules should be absolute, with no possibility of interpretation. The computer cannot make assumptions and must be told exactly what to do. Traders can take these specific sets of rules and test them against historical data before risking any money in live trading. Thorough backtesting allows traders to assess and refine a trading idea and determine system expectations – that is, the average amount a trader can expect to gain (or lose) per unit of risk.

Because business rules are established and trade execution is carried out automatically, discipline is preserved even in volatile markets. Discipline is often lost due to emotional factors such as fear of suffering a loss or the desire to make a little more profit from a trade. Automated trading helps maintain discipline because the trading plan will be followed exactly. In addition, the “piloting error” is minimized. For example, if a buy order for 100 shares is not entered incorrectly as a sell order for 1000 shares.

One of the biggest challenges in trading is planning the trading and trading plan. Even though a trading plan has the potential to be profitable, traders who ignore the rules change the expectations the system might have had. There is no one trading plan that saves 100% of the time. After all, losses are part of the game. But losses can be psychologically traumatic, so a trader who has two or three losing trades in a row may decide to skip the next trade. If this next trade was successful, the trader has already destroyed any expectation in the system. Automated trading systems allow traders to achieve consistency in trading the plan.

Because computers react immediately to changing market conditions, automated systems are able to generate orders as soon as business criteria are met. Entering or exiting a transaction seconds earlier can make a big difference in the outcome of the transaction. As soon as a position is entered, all other orders are generated automatically, including protective stop losses and profit targets. Markets can move quickly and it is discouraging for a trade to reach its profit target or exceed a stop loss level, even before orders can be placed. An automated trading system prevents this from happening

Disadvantages of Automated Systems

Automated trading systems have many advantages, but there are certain disadvantages and realities that traders should be aware of.

The theory behind automated trading makes it simple: set up the software, set the rules and watch it trade. In reality, automated trading is a sophisticated trading method, but not foolproof. Depending on the trading venue, a trading order may reside on a computer and not on a server. This means that if the internet connection is lost, an order may not be sent to the market. There may also be a mismatch between the “theoretical trades” generated by the strategy and the component of the order entry platform that turns them into actual trades. Most traders should expect a learning curve when using automated trading systems, and it’s usually a good idea to start with small trades as the process becomes more refined.

While it is great to turn on your computer and get through the day, automated trading systems require supervision. This is due to the risk of technological failures, such as connectivity issues, power outages or computer crashes, and system quirks. It is possible that an automated trading system will encounter anomalies which could lead to incorrect orders, missing orders or duplicate orders. If the system is monitored, these events can be identified and resolved quickly.

Although not specific to automated trading systems, traders using backtesting techniques can create systems that look great on paper and perform terribly in a real market. Hyper-optimization refers to an excessive adjustment of the curve which produces an unreliable trading plan in live trading. For example, you can modify a strategy to achieve exceptional results on the historical data on which it has been tested. Traders sometimes mistakenly assume that a trading plan should have near 100% profitable trades or never have to undergo a withdrawal to be a viable plan. As such, the parameters can be adjusted to create an “almost perfect” plan – one that fails completely as soon as it is applied to an actual market.

The Bottom Line

Although attractive for a variety of reasons, automated trading systems should not be viewed as a substitute for carefully executed trading. Technological failures can occur and as such these systems require monitoring. Server-based platforms can provide a solution for traders who wish to minimize the risk of mechanical failures. Remember that you need to have some trading experience and knowledge before deciding to use automated trading systems.

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