What is automated trading?
Trades are initiated and exited automatically via the use of a computer programme or algorithm that adheres to predefined rules set up by a user. Automated trading is a term that refers to this. You will combine technical analysis with features such as open orders, trailing stops, and guaranteed stops as a trader. Because your transactions will be handled completely autonomously, you will have more time to concentrate on other areas of your trade.
When you utilise automated trading, you may complete a large number of trades quickly and eliminate emotional bias from your trading decisions. Algorithms enable you to monitor trends and execute transactions in accordance with your predetermined plan.
With automated trading, you’ll speculate on the rise or fall of the underlying market price by making spread bets or contract for difference (CFD) trades.
To get started, choose a trading platform and create a trading strategy. You’ll create a set of trading rules and conditions based on your trading experience, and your proprietary algorithm will use those rules and conditions to execute trades on your behalf. Considerations include the timing of the transaction’s commencement and conclusion, as well as the amount to purchase or sell. For instance, if Company X’s 50-day moving average exceeds its 200-day moving average, you should buy 100 shares.
If the trading strategy’s stated conditions are met, the trading strategy’s automated trading system will execute trades automatically.
These transactions are leveraged and should be regarded as such due to the use of spread betting and contract for differences (CFDs). To get exposure to a larger stake, you must first make a small investment (referred to as margin). Due to the fact that profits and losses are calculated on the whole size of the position rather than the margin amount, you run the risk of incurring losses much larger than your initial investment.
However, if your criteria do not accurately predict the extent to which the market would shift, human error will affect your findings. Apart from that, the increased volume and speed with which automated trades are executed puts you at risk of compounding losses.
Creating “Rules” for Trading
Certain trading platforms provide strategy-building “wizards” that enable users to choose from a list of frequently used metrics in order to create a set of rules that are then traded electronically. For example, the user may specify that a long position would be opened if the 50-day moving average crosses over the 200-day moving average on a five-minute chart of a certain trading instrument. In simpler terms the rules are instructions that if this happens then do this, or if this happens and this also happens then do this and don’t do this and do them when. Additionally, users may specify the kind of order (market or limit, for example) and the time at which the transaction will be initiated (for example, at the closing of the previous bar or the start of the following bar), or they can use the platform’s default settings.
However, many traders prefer to develop their own unique indicators and methods. They often collaborate closely with the programmer throughout the system’s development. While this takes more work than utilising the platform’s wizard, it provides a far larger degree of freedom and may provide more gratifying outcomes. As with everything else in the trading world, there is no such thing as a foolproof investing plan.
After establishing the rules, the computer may watch the markets for buy or sell opportunities that match the trading strategy’s requirements. Depending on the specified criteria, orders for protective stop losses, trailing stops, and profit goals will be created automatically as soon as a trade is made. Instantaneous order entry may make the difference between a modest loss and a catastrophic loss in fast-moving markets.
The Benefits of Automated Systems
There are many benefits to using a computer to monitor markets for trading opportunities and execute transactions, including the following:
Backtesting evaluates an idea’s feasibility by applying trading rules to previous market data. When developing an automated trading system, all rules must be strict, leaving no room for interpretation. The computer cannot make educated assumptions and must be instructed precisely what to perform. Traders may use these exact sets of rules to historical data and validate them prior to risking money in real trading. Backtesting thoroughly enables traders to assess and fine-tune a trading concept, as well as to calculate the system’s expectancy — the average amount a trader may anticipate to earn (or lose) per unit of risk.
Automated trading systems let traders maintain a low level of emotion during the trading process. Traders generally have an easier time adhering to the strategy when their emotions are in control. Due to the fact that trade orders are executed automatically once the transaction criteria are fulfilled, dealers will have no opportunity to pause or dispute the trade. Along with assisting traders who are fearful of “pulling the trigger,” automated trading may help individuals who are prone to overtrading — buying and selling at every apparent opportunity — rein in their behaviour.
Speedy Order Entry
Due to the instantaneous response of computers to changing market circumstances, automated systems may issue orders as soon as trading requirements are satisfied. Entering or exiting a transaction a few seconds sooner or later may make a significant impact in the result of the deal. Once a position is placed, all further orders, including protective stop losses and profit objectives, are automatically created. Markets move fast, and it’s discouraging to see a trade hit the profit goal or blow beyond a stop-loss level – even before the orders can be placed. This is prevented by an automated trading system.
Maintaining Discipline and focus
Due to the fact that trading rules are set and transaction execution is automated, discipline is maintained even in turbulent markets. Discipline is often lost as a result of emotional reasons such as fear of losing money or the urge to squeeze out an extra profit from a transaction. Automated trading helps preserve discipline by ensuring that the trading strategy is followed precisely. Additionally, “pilot error” is reduced. For instance, a purchase order for 100 shares will not be recorded erroneously as a sale order for 1,000 shares.
One of the most difficult aspects of trading is planning and executing the transaction. Even if a trading strategy has the potential to be successful, traders who violate the rules distort the system’s expectation. There is no such thing as a trading strategy that is guaranteed to win every time. After all, defeat is a natural aspect of the game. However, since losses may be psychologically traumatic, a trader who has lost two or three consecutive transactions may opt to forego the following trade. If the following transaction is a winner, the trader has already shattered the system’s expectation. Traders may attain consistency by trading the strategy using automated trading systems.
Diversification of Trading
Automated trading systems enable users to manage several accounts or strategies concurrently. This may help distribute risk while also providing a buffer against loses. What a person would find very difficult to do is effectively accomplished by a computer in milliseconds. The computer is capable of scanning several markets for trading opportunities, generating orders, and monitoring transactions.
Think of it like this. If you had a human adviser you would tell them what you were interesting in trading, what you wanted to achieve, when you wanted to achieve that and some rules relating to what risks you were willing to take and what to do when certain criteria were met. This is exactly what automatic trading will do for you.
But, and there is a but. If you think that you are going to invest your hard earned cash in anything and the algorithm will make you money you are sadly mistaken. YOU are the trader. You still have to have a strategy, you still have to decide what your criteria will be, and ultimately you will have to take responsibility for the stocks and trades.
If you invest in Betamax shares no amount of AI and automated trading will make you money. The key is to think about the algorithm as a rather obedient flowchart that will carry out your express wishes. You have to learn the software and make sure that the criteria you set is what you want the algorithm to carry out. It will do exactly what you tell it to do. The “automated” part is not a goose that will lay golden eggs.
Having said that you will benefit from the algorithm having access to historical data to decide what it’s/your next move will be. It will take out the emotional bias, it will take advantage of situations while you sleep that would otherwise be missed.
The upsides of automated trading far outweigh the downsides if used correctly. The opportunities to invest are now easier than ever before. If you have ever wanted to start investing but don’t want to spend hours just monitoring the market and your portfolio, and you want to invest small at first then there has never been a better time to jump in.