As trading has become more common, technology has advanced in order to make it more accessible and user-friendly for the individual. There is now a range of technology that is designed specifically to make trading automated. So, what is automated trading? In one line, it is a computer program that creates trading orders and submits them automatically to a trading exchange. One of the main advantages of this is that it allows you to trade more effectively. Here we will look at how automated trading works.
Creating Trading Strategies
Just because you are using an automated trading system, does not mean that you will have no input into the trading strategy that is used. In fact, you can build your own trading strategy and this can be implemented for you by a trading algorithm. It can do this when you instruct it on the parameters you are defining, including technical indicators, risk management triggers, current market prices, and high, low, opening and closing levels. Top level software will take you through the process of building your own strategy, but if you prefer, pre-built strategies are easy to find and use.
Running a back test
One of the major advantages of using trading platforms is the ability to back test. This means that once you have built your strategy, you are able to back test it, using historical data to see how it would have performed. The strategy will run and you will be issued with a report indicating how your strategy would have performed. You can then make changes to your strategy and retest it until you are satisfied.
Advantages of Automated Trading
There are many advantages of automated trading which is why these trading platforms have become so popular. Some of the advantages include:
- Eliminate emotion – One of the main downfalls for traders is when their emotions impact their trading and they end up not trading according to their strategy because they are chasing losses or aiming for even bigger wins. When trades are executed automatically, it means that all the trade rules have been met.
- Consistency – It is not possible for trades to be profitable every time and it can be disheartening to see a good strategy that does not work. However, trading is most profitable when a long-term approach is taken and automation ensures that you follow the long-term approach, continuing to trade, even after losses, when the trading rules have been met.
- Entry speed – Automated systems can generate trades as soon as the trade rules have been met, with no delay. This compares to manual trading where delays are inevitable and can make a difference to the trade’s outcome.
- Diversification – With automated trading, customers can trade via multiple accounts or with multiple strategies at one time, which allows them to spread their risk in a way that a person would not be able to do manually.
Automated trading has many advantages for the individual trader and it is worth understanding how it works before you begin trading.