Automated trading systems allow computers executing and watching the trades. The main benefit of such systems is absence of the human emotions in the process of trading. The trades are set automatically according to the parameters.
Automated trading systems (mechanical trading systems, system trading, automated trading, or algorithmic trading) is a system enabling traders to set certain rules for both entries and exits. Once it is programmed, it is automatically executed through a computer. Certain simple conditions, including moving average crossover, can be applied to trade entry and exit rules. There are also more complicated strategies demanding a full understanding of programming language.
As soon as the user establishes all the rules, the computer monitors the markets for buying or selling opportunities depending on the specifications of the trading strategy. Computer automatically generates protective stop losses, profit targets, and trailing stops.
Automated Trading Benefits
- Absence of emotions. Without having their emotions involved, traders can stick to their plan easier. Once you set up all the rules, you are no longer able to hesitate and change something.
- Backtest. All the rules are absolute and there is no place for any interpretations. The computer is told what to do exactly. When backtesting, traders are able to evaluate and understand the idea of trading, know what to expect from the system, realize what would be the best amount to win or lose per unit of risk.
- Discipline.Even in volatile markets there is a discipline thanks to automated trading. In that type of trading, the trading plan is followed strictly.
- Sequence. It’s impossible to create a trading plan that wins all the time, some losses will always be present. However, a trader who had 2-3 losses in a row might be afraid to execute the next trade and will skip it simply. That next trade could be the winning one. Thanks to the automated trading, a trader can reach sequence in trading his plan.
- Diversity of trading.Traders are able to trade more than one account or different strategies at the same time. Thus, a trader is able to spread risk over multiple tools and create a hedge against losing positions. The computer scans for trading opportunities across different markets within milliseconds.
- Improved speed of order entry. Computers react immediately to changing conditions on the market. Automated systems can generate orders once the trade criteria are met. The outcome of the trade can change depending on several seconds you get in out of trade. Once you enter a position, the rest of orders are generated automatically along with protected stop losses and profit targets.
Automated Trading Drawbacks
There are lots of perks of using automated trading systems. However, there are some disadvantages of using it you should be aware of too.
- Need of monitoring. Automated trading systems still require monitoring because of the risk of mechanical failures. There might be problems with connection, computer issues, etc. Because of them automated trading system can make wrong, duplicate, or missing orders. When you monitor your system, you can find out and solve such problems easily.
- Over-optimization. Traders often create as they suppose, a perfect plan, which experiences different drawdowns in real market. The over-optimization in automated systems creates plans looking good only in theory.
Automated trading systems have a large number of pros, as well as some cons of using them. It surely should not substitute other types of trading. However, it is a good alternative for those who have lack of time or experience.