Autotrading
What is automatic trading?
Auto trading is a trading plan where buy and sell orders are placed automatically based on an underlying system or program. These orders are placed when the conditions for trading in the underlying system or program are met.
MAIN POINTS TO REMEMBER
- Automatic trading consists of automatically placing buy and sell orders according to a programmed strategy.
- Advanced automatic trading, which limits human participation in the trading program, requires a sophisticated trading program.
- Automatic trading allows quick execution of orders as soon as the conditions of a programmed strategy are met.
- Autotrading programs can be based on almost any strategy, but the strategy must be programmable and carefully tested for profitability before attempting to execute
Understanding Autotrading
Auto trading allows investors to take advantage of market opportunities in real-time. This usually involves complex programming and in some cases sophisticated trading platforms that support external or plug-in programming.
Merchants can design their applications or connect to a program, to perform automated transactions based on a personalized strategy.
The basic forms of auto trading can be used by all types of retail investors. For example, defining orders that will be filled in the future when certain criteria are met is the simplest form of auto trading.
At a more advanced level, automatic trading eliminates human intervention. Once the software has been programmed, it will continue to operate without interference or human intervention. In the advanced case, traders will continue to closely monitor their schedules to ensure they are performing as expected.
Overall auto trading system are used in a wide range of markets including stocks futures, options, and forex
Auto Trading Feature
Auto trading requires a predetermined trading strategy. Strategy is the basis of the computer program, which defines when and why it will be negotiated. It can be structured in various ways for all types of investors.
Retail investors can implement basic automatic trading plans that make investments at regular intervals or place conditional orders on stocks meeting certain parameters. Contingent orders allow an investor to enter trades at specific levels for automatic execution when a price is reached.
Institutional investors and technical traders will use complex systems that allow for conditional orders and strategies such as grid trading, trend trading, scalping or fading.
Many technical day traders will only work with brokers who allow plugins or external programs to connect to their platform, or who offer a coding program within the platform itself to create indicators and automatic trading programs.
Brokerage platforms such as TD Ameritrade and Interactive Brokers, for example, offer coding and auto-trading capabilities.12 Institutional investors typically have their proprietary trading platforms that allow auto-trading through algorithmic programming.
Autotrading Strategies
Institutional investors can use complex algorithms that seek to transact through investment portfolios based on defined criteria governed by the objective of a portfolio. This can include buying or selling stocks automatically to maintain a specific percentage or dollar allocation to each stock, or matching portfolio holdings to an index.
Technical day traders will use automatic trading to invest based on technical market signals. They generally use complex conditional orders for automated trading. These types of orders allow an investor to specify an entry price and build a collar around the trade to establish predetermined profit and loss levels for risk management.
Autotrading programs can be built to capitalize on developing trends, trade spreads, trade ranges or bid / ask spread scalping. There are countless strategies. Their use is only limited by the trader’s ability to come up with profitable strategies and program them effectively.
Autotrading is also popular for investors in the forex market. Most brokers offer a platform with the ability to install apps offered by other traders and businesses. A word of warning: the widespread use of auto trading in the forex market has led to an abundance of shoddy, untested software. The field is littered with con artists.
Auto Trading Strategy Criteria
Auto trading may seem simple, but programming a simple trading strategy is also complex. Rules should be simple enough to be coded and cannot include subjectivity, because the computer needs rules defined.
Items to consider include, but are not limited to:
The size of the location and how it will be defined;
How will exchanges be entered and what specific parameters will activate an exchange;
How transactions will be closed and what causes a transaction to close;
Stresses on the system, such as when it should or should not trade;
Need for guarantees.
These topics are discussed in more detail below.
Position Size Definition
For example, a position size might be 10% of account equity. Or it could be more advanced, first setting the difference between the entry price and the stop loss, setting a maximum risk, for example, 1% of the account capital, then setting the position size according to the risk of 1% and the distance between the stop loss and the entry on a given trade. This more advanced approach to position sizing is sometimes referred to as optimal position sizing because the position size changes depending on the details of a transaction.
Trade Entry
For example, for a trade to be entered on a moving average (MA), the crossover requires the price to be on one side of the MA first and then the other. The data source must also be specified. How does the price determine: the last price? The more complex the system, the more criteria and factors must be taken into account
