What Is an Automated Trading System?

Automated trading systems, also known as algorithmic trading, automated trading, or system trading, let traders set up particular rules for trade entry and exits that, once programmed, can be carried out automatically by a computer. In fact, according to a number of platforms, between 70 and 80 percent of the shares traded on American stock markets come from automated trading systems.

 

Traders and investors can create automated trading systems that enable computers to execute and monitor deals by incorporating precise entry, exit, and money management criteria. One of the main benefits of strategy automation is that if trades are done automatically when certain conditions are satisfied, it can help to reduce some of the emotions associated with trading.

 

The conditions for trade entrance and exit rules might be straightforward, like a moving average crossing, or they can be complex methods that call for a thorough knowledge of the programming language used by the user's trading platform. They may also be founded on a qualified programmer's subject-matter knowledge.

 

Any special rules for automated trading systems must be developed in the platform's proprietary language and often call for the usage of software connected to a direct access broker. Programming in EasyLanguage is used, for instance, in the TradeStation platform. The NinjaTrader platform, on the other hand, makes use of NinjaScript. An example of an automated approach that initiated three trades during a trading session is shown in the image below.

 

Setting Up Trading "Rules"

Some trading platforms feature "wizards" for developing strategies that let users choose from a variety of widely used technical indicators to create a set of rules that can then be traded automatically. On a five-minute chart of a particular trading instrument, the user could decide, for instance, that a long position trade will be initiated once the 50-day moving average crosses over the 200-day moving average. The kind of order (market or limit, for example) and the time the trade will be executed (for example, at the close of the current bar or the start of the following bar) can also be entered by users, or they can utilize the platform's default values.

 

However, a lot of traders prefer to program their own unique indicators and approaches. They frequently collaborate closely on system development with the coder. Although it usually takes more work than using the platform's wizard, this method offers far more freedom, and the outcomes could be more satisfying. Unfortunately, there is no ideal investing plan that will ensure success, just like there isn't in the trading industry.

 

Once the rules are in place, the computer can watch the markets and look for buy or sell opportunities in accordance with the trading strategy's guidelines. Depending on the individual regulations, any orders for protective stop losses, trailing stops, and profit goals will be immediately generated as soon as a trade is entered.

 

Advantages of Automated Systems

The benefits of using a computer to execute transactions and monitor the markets for trading opportunities are numerous and include:

 

Reducing Emotions

Automated trading platforms keep emotions to a minimum while trading. Traders often have an easier time sticking to the plan by controlling their emotions. Trade orders are automatically executed after the trade rules are satisfied, so traders cannot pause or second-guess the trade. Automated trading can restrain traders who are inclined to overtrade, buying and selling at every apparent opportunity, in addition to assisting those who are hesitant to "pull the trigger."

 

Backtesting

Backtesting uses previous market data and trading rules to assess an idea's viability. All rules must be unambiguous and without space for interpretation when creating an automated trading system. The computer is unable to hazard a guess; it requires explicit instructions. Before putting their money at risk in live trading, traders can use these specific sets of rules and test them on historical data. With careful backtesting, traders can assess and fine-tune a trading concept and estimate the system's expectation, or the typical amount per unit of risk that a trader can expect to gain (or lose).

 

Maintaining Discipline

Even in tumultuous markets, discipline is maintained since trade rules are defined and trade execution is carried out automatically. Emotional considerations like the dread of suffering a loss or the desire to squeeze out just a little bit more profit from a deal cause discipline to be lost frequently. Automated trading makes it easier to keep discipline because the trading strategy will be adhered to precisely. Furthermore, "pilot error" is reduced. For instance, if a mistake is made and a 100 share buy order is placed as a 1,000 share sell order.

 

To plan a deal and execute it is one of trading's most difficult tasks. Trading plans may be profitable, but traders who break the rules change any expectations the system would have had. A trading strategy that consistently outperforms the market does not exist. Losses are inevitable in any game, after all. Losses, however, can be psychologically traumatic, so a trader who has had two or three consecutive losing trades may decide to forego the next one. The trader has already ruined whatever hope that the system had if this next trade had been a success. Trading the plan consistently is made possible by automated trading platforms.

 

Accelerating Order Entry

Automated systems are able to generate orders as soon as trading criteria are satisfied since computers react to shifting market conditions instantly. A few seconds earlier entry or exit can have a significant impact on the result of a deal. All additional orders, including as protective stop losses and profit goals, are produced automatically as soon as a position is opened. Markets can move quickly, and it can be disheartening to see a trade hit its profit target or blast beyond a stop-loss level before the orders can be placed. This is avoided by using an automated trading system.

 

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