Automated trading is a new concept revolutionizing the way investors conduct research and execute orders in the financial markets. It is one of the ground-breaking innovations in the world of trading and financial markets where sophisticated software takes over from the human trader.
Automated trading is a mechanism for investors to participate in the financial markets through pre-set rules to make trade orders. Also known as algorithmic trading, trading rules are programmed into a trading system in the form of an algorithm. These rules include precise entry and exit points and money management techniques that can be designed to follow certain trends and execute trades accordingly. Investors can use a PC or mobile device connected to the internet to trade automatically.
The first step to automated trading is choosing a trading platform. Investors can then use their financial experience to determine trading rules favorable to them. The trading rules are usually written in the programming language specific to the platform. It is therefore important to fully understand the platform before deciding on the actual trading rules. The trading rules are designed to follow common parameters like volume, price and timing. The rules can also follow technical indicators such as Money Flow Index or MACD.
Some platforms have investment strategy “builders” that allow investors to select common technical indicators from a list. The users can then build trading rules based on these technical indicators. The system will open or close positions once the parameters have been met. Majority of traders however prefer to design their own custom indicators and trading strategies. To achieve this, the traders collaborate with programmers to develop their custom system. The advantages of a custom system is that users have more freedom to explore the financial markets.
It is common to hear traders say that you need a fool-proof strategy to reap in the financial markets. The truth however is that there is no perfect strategy to beat the market even with automated trading. That being said, there are obvious pros and cons of choosing automated trading. These will inform your decision whether to adopt the technology-driven algorithmic trading, or go the manual way.
Newbies looking to get into trading may sometimes feel intimidated by the jargon and all elements surrounding manual trading. Automated trading however allows even newbies to start investing in the financial markets. For instance, armed with basic knowledge of the terminology, trading strategies and forces affecting markets, newbies can use automated trading to execute their first trades. This means that you don’t have to spend too much time looking to become a manual trading expert first.
With automated trading, you don’t have to spend long hours glued to your computer as you trade. This would sap all your energy and also get in the way of other activities such as bonding with family, eating or even sleeping. Once you set the trading rules, you can go about your day’s business, rest assured that the system will trade on your behalf.
Backtesting a manual trading strategy can be tedious. On the flip side, automated systems allow users to easily backtest their strategies in order to optimize them. A thoroughly backtested and optimized strategy gives traders the confidence that their trades will be profitable.
When trading with expert advisors, lack of emotion is usually termed as an advantage. Trades are executed automatically, eliminating the emotional bit where a trader could, for instance hesitate to open or close a position.
Automated trading allows users to employ simultaneous trading strategies aimed at increasing profitability.
With automated trading, you are wholly reliant on technology. Any failure could result in loss of earning. If the trading software crashes, it will be impossible to open or close a pre-set position. Other issues like internet connection fluctuations or server and computer problems might affect the system.
Even after designing your strategy and leaving it for the system to execute trades, you will have to do some monitoring. This is important in the event of system anomalies or mechanical failure.
Some traders design trading strategies that seem impressive on paper but fail to deliver in a live market. It is important to understand that there may be hindrances to profitability, despite the strategy being seemingly perfect.
Automated trading can be a good strategy to increase profitability in financial markets. It is important to weigh the pros and cons before plunging into the markets because fluctuations in the market can greatly affect the outcome of any position.