Understanding Automated Trading Systems

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Automated trading is also known as system trading, mechanical trading, automated trading, or algorithmic trading. And automated trading systems are actually pre-programmed apps. These computerized trading systems have become increasingly popular among investors and beginner traders as it makes the entire trading process hustle-free., and as per the latest report, a significant share of around 70-80% percent of the total US stock exchanges was traced from automatic or algorithmic trading systems. 

Advantages of automated trading systems

Speaking of the advantages, there is a long list. Once you deploy an automated trading mechanism for trading, you increase the trading opportunities and carry out trades faster. Significant advantages of using mechanical trading systems are discussed below. 

1. Diversifying trading 

By using the automated trading system for trading, the users are provided with the opportunity to trade multiple accounts at the same instant. Potential risk factors are associated with developing a hedge against missing out on positions. Automated trading, like copy trading, allows you to copy a position attained by another trader. The computer can efficiently scan for available or upcoming trading opportunities across various markets. It also can effectively monitor trades and generate orders related to trading.

2. Minimizing emotions. 

One of the significant advantages of using the automated trading system is that it helps keep emotions out of the entire trading process. Once the emotions are in check, half the battle is won because for the traders; it becomes easy to stick to their plan. It will also eliminate the chances of trading driven by emotions. 

3. Backtesting 

The automated trading system leaves zero room for interpretation because while building a system like this, the rules are definitive. The computer, despite its ability, cannot decide on its own and must be told what to do. Therefore, before investing their money in live trading, traders take these rules and run tests purely based on historical data. Backtesting, facilitate the traders to analyze and understand the trading idea. 

4. Accelerating order entry speed

As the market is constantly changing space, computers can execute a quick response to any change that happens. And once the trade criteria are accomplished, the systems have the potential to generate orders. 

Disadvantages of automated trading systems. 

Everything has a positive and negative side. Similarly, automated systems also boast a few disadvantages that every trade must be aware of before beginning to trade with these systems. Let's discuss them separately. 

1. Mechanical failures 

As mechanical trading involves tons of technology, novice traders will likely face a steep learning curve. Therefore, it is always best to start trading small, and you can gradually increase the size once you get the hang of the trading system. No system is 100% perfect; there can be system failures and mistakes; you need to look out for them and not entirely rely on automated systems for trading. 

2. Monitoring 

Automated trading systems require monitoring of functionality. This is mainly because of the possible system failures such as computer crashes, poor connectivity, power losses, and more. Such anomalies could cause the system to lose orders and mediate duplicate orders. 

3. Over-optimization 

When seen from the outside, automated trading systems may look great but could perform terribly in the live market due to over-optimization. It is nothing but producing trade plans that don't fall in line with live trading, and the chances of it failing is high. 

Even though the word says automate, there are certain things you need to know about this trading system before you begin trading with it. Make sure you have a clear picture of the ins and outs of the system. This way, you can maintain your strategy as simple as possible. And later, when you turn to complicated trading, it becomes easy to achieve your goals. Remember, you have to figure out the ideal trading strategy according to your situation. 

Bottom line 

The overall outlook of an automated trading system is pretty impressive, but it is best to consider automated trading as a substitute for manual trading. There are possibilities of technology failures, and these systems do not demand active monitoring. However, you should first decide whether or not to adopt automated trading systems; you need adequate experience and knowledge in this field.

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