Automated Trading: Pros, Cons, and How to Get Started!

An automated trading system is often known as a mechanical trading system, algorithmic trading, or system trading. This enables traders to define specific rules for trade entries and exits. It can then be executed automatically using computer programming. A significant portion, around 70% to 80% or even more, of shares traded on U.S. stock exchanges are attributed to automated trading systems.

These systems allow traders and investors to convert precise trading rules, including entry, exit, and money management criteria, into computer programs that can execute and supervise trades. An advantage of automating strategies is that it can eliminate emotional factors from trading, as trades are executed solely based on predetermined criteria.

Rules for Entering and Exiting Trades

The rules for entering and exiting trades can range from simple conditions like a moving average crossover to complex strategies. This can demand a deep understanding of the platform’s programming language. Traders can either use existing platforms with built-in strategy-building tools or collaborate with programmers to develop custom indicators and strategies. Automated trading systems require specialized software linked to direct access brokers. It needs to be written in the proprietary language of the chosen platform.

Wizards- What are they?

Some trading platforms offer strategy-building “wizards” that allow users to select technical indicators to establish rules for automated trading. For instance, a user might set a direction for a long position when a 50-day moving average crosses above a 200-day moving average on a five-minute chart. Users can determine order types and trigger conditions. 

However, many traders opt to program their indicators and strategies. They work closely with programmers to achieve a higher degree of flexibility and potentially better results.

Upon setting the rules, the automated system can scan markets for potential trade opportunities based on the specified strategy. Depending on the rules, the system can generate orders for stop losses, trailing stops, and profit targets as soon as a trade is initiated. Rapid order execution can make a significant impact in swiftly changing markets, helping to mitigate potential losses.

Benefits of Automated Trading

Automated trading systems offer several benefits, such as reducing emotional influence, facilitating backtesting of strategies using historical data, maintaining discipline, improving order entry speed, and enabling diversification across multiple accounts or strategies. 

Drawbacks of Automated Trading

However, there are drawbacks to consider, including the possibility of mechanical failures, the need for ongoing monitoring, the risk of over-optimization, and scams in the automated trading space.

How to Avoid Scams?

To avoid scams, traders are advised to scrutinize systems before making payments. Traders should conduct thorough research, read reviews from reputable sources, and be cautious of systems that promise extraordinary profits. Server-based automation is an option, where trading systems run on a server platform for faster and more reliable execution.

However, before diving into automated trading, traders should carefully evaluate whether automation aligns with their goals and expertise. Customization, understanding the chosen system, and keeping strategies straightforward are vital factors to consider when approaching automated trading.

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