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What Is an Automated Trading System?

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Automated trading systems are automatic systems that allow investors to set up explicit rules for trade entries and exits. Once a trader has programmed such a system, the program executes trades automatically via a computer.

Automated trading systems help to augment trading. This is because they allow more shares to be traded on the exchanges.

One of the characteristics of automation is precision. For example, you can turn precise entries and exits as well as money management rules into an automated trading system. The computer then executes and monitors your trades.

Moreover, trading can be a very emotionally draining process. Watching your funds take a dive when the market turns against your position is no fun. But automated trading systems help to take some of that emotion out of the equation. Your automated system will place your trades automatically when the market meets the conditions you have set.

Automated trading systems operate with software that links to a direct access broker. Your online trading platform has lots of information on automated trading.

Building Automated Trading Rules

Some platforms offer strategy-building wizards that choose technical indicators to establish trading rules. You can establish, for instance, when to enter a long-position trade as well as set stop orders.

Experienced traders may opt to program their own indicators and strategies. They partner with the programmer to develop customized indicators. This allows the trader more versatility and the chance of achieving greater rewards.

Naturally, it is easier to use the platform’s wizard. However, seasonal traders may want more than the platform has to offer. This does not mean that a customized automated trading strategy guarantees success. There is, after all, no perfect investment strategy.

When you have established your rules, your computer monitors the market to discover trade opportunities based on your specifications. Then, once the program enters a trade, it generates the following:

  • Stop-loss orders
  • Limit orders
  • Profit targets

These automated entries can be that line between a small or a monumental loss if the trade goes against your position.

Benefits of Automated Trading Systems

Automating your trading processes comes with a profusion of benefits. Some of these benefits are:

1. Reducing Emotional Turmoil

Anyone who has ever traded will tell you that your emotions can take quite a hit. With automated trading systems, though, you have a better chance of reducing emotional reactions and staying on your chosen path.

It also helps to control overtrading. Some traders have been known to go on a buying spree, trying to exploit every opportunity.


2. Enhancing Discipline

Since you have already set the rules ahead of time, it is easier to enhance discipline. There is nothing to do but grit your teeth and dig your heels in. However, without automated trading, your discipline could fly out the window in the heat of craving more profits or avoiding losses.

Once you have automated your trading process, it follows your set trading plan automatically. This eliminates the possibility of error. On the other hand, it is possible to make errors, especially when entering figures manually.

3. Reducing Backtesting

Backtesting involves basing your trading on historical data to figure out the feasibility of an idea. An automated trading system contains absolute rules that leave no room for a back-and-forth. The system is programmed to execute the orders you give it. It will not deviate from that.

Hence, before risking your money on live trading, test your rules on historical data. Experienced traders can use backtesting to edit trading ideas and evaluate their speculations.

4. Increasing Speed

Automated systems are programmed to respond immediately to changes in market conditions. They will, therefore, generate an order the moment change is detected and as long as the set conditions are met.

Getting your order in quickly can be the deciding factor in the state of your finances. Once your position is entered, all other orders are automatically induced.

Is Automated Trading the Perfect Solution?

Automated trading may sound like the perfect solution. However, carefully thought-out and executed trading carries the day. Technology is not always reliable and editing your options is not possible once your set program has executed a trade.

On the other hand, server-based trading platforms offer support for investors who are concerned about technological hiccups. But be sure to do some manual trading first, and gain experience before you opt to automate your trading.