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May 31, 2022

What You Must Know About Automated Trading Systems



Does the idea of automated trading appeal to you? Whether you're a beginner or an experienced trader, there are significant benefits to be gained by learning how auto-trading works, why it works, and the best times to use it. In its simplest form, automated trading lets account holders work with a series of algorithms and fixed instructions so they can set it and forget it, at least in theory.



But there are some important features of automated trading that many should understand before they dive in. Fortunately, the top brokers offer tutorials and demo accounts so newcomers to the concept can try it out first in a non-threatening, no-risk environment before using it for their own trading purposes. What is automated trading, and what are its central advantages? Likewise, what should users be aware of in terms of possible drawbacks and dangers of the method? As is the case with all new techniques and technological features available to traders, it's crucial to review the pertinent facts as a necessary first step.

What Automated Trading Is and Isn’t

You'll hear this called by many names, most of which include words like mechanical, automatic, algorithmic, or system. The main feature of automated trading platforms is their ability to execute rules created by users for the purpose of order entry and order exit. In other words, you write your own set of trading rules, and a computer carries them out. If you don't think this type of activity is popular, then you haven't been following the topic in recent news. By most accounts, the majority of all US stock exchange buying and selling is performed by these systems. However, it's essential to realize that the bulk of auto-orders are initiated by major institutions and governments, not individuals.

That situation is finally changing. Now that most of the top brokers offer auto-trade features via proprietary platforms, many new and experienced account holders are opting to use the programs, at least for part of their everyday buying and selling activities. Be careful to know the difference between true programs and others that only offer a few automated functions. Always check with a reputable broker to find out whether they offer the authentic functionality of auto-trading. Some do, and some don't, so find out by asking reps what the platforms can and can't do in terms of algorithmic performance.

What Are the Main Benefits?

It's a fact that many individual trading enthusiasts are attracted to the concept of automation. What are their reasons? Is it about simplicity, saving time, or something else? Actually, there are numerous reasons people opt to set at least a portion of their transactions on auto-trade. In most cases, it's about convenience, the ability to do back-testing, avoiding emotional buying or selling, making more trades, or just not having enough time to watch a computer screen for hours at a time. In a way, automation for a trader is much like cruise control for the driver of a vehicle. You can set it, but it's wise not to forget it. Automation is one of those modern luxuries that offers lots of benefits but comes with a few risks as well.

Back-Testing

For the statistical-minded, one of the inherent benefits of automated trading is the ability to do extensive back-testing of results before choosing a rule or set of rules for automated buying and selling. Though back-testing has its limitations and only deals with historical, not future price activity, investors can gain important insights into their systems by running tests on prior data.

Overnight Positions

Even if you put in a full workday watching the screen and following all your positions in real-time, you can hold overnight or long-term positions via auto-trade. After testing a system for several days, at least, you might finally feel confident enough to set your positional parameters and go to bed. It's always smart to check performance first thing in the morning, mainly to review profitability results but also to assess whether the programs performed according to your algorithmic instructions.

The Emotional Problem

Human beings are emotional creatures, and that can sometimes cause problems for people who buy and sell securities. Automation is one of the most effective ways of removing emotion from the equation. Once you've created a rules-based system and set the auto-trade platform up correctly, there's no room for your feelings to get in the way. For so many dedicated traders, there are those days when it just seems impossible to pull the trigger. Sometimes it's because of individual reluctance, a gut feeling, or the size of a purchase. But when rules are in place, and an algorithm is executing the transaction, you don't have to worry about getting cold feet.



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