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Choosing the Best Automated Trading System

Trading in the financial markets can be both nerve-wracking and dangerous. You’ve got to keep a close watch on various parameters while entering and exiting trade at precise moment. If your attention falters for some time, you may miss out on a lucrative opportunity.

Even if you track the various developments that could affect your trades, you could fail to follow your strategy at the last moment. Losing your way in a trading system can negate all the work that you’d done.

By automating your trading strategy, you can ensure that your trades are exactly complete. Envision a computer program that works according to the instructions that you have given. That means executing trades at the precise moment when all the required conditions are successful. As there is no manual intervention, each trade will satisfy the complete set of parameters that you have laid down.

Automated trading, also algorithmic trading or system trading, can take the human component, such as greed and fear, out of the process of executing a trade.

This can yield tremendous benefits in terms of speed and accuracy. By devising a sound strategy and using automated trading effectively, it’s possible to place an order that will be in an appropriate rate.

You won’t have to monitor the market on a constant basis and wait for the precise moment to execute your trade. The automated trading system will take over this responsibility from you. This article will focus on automated trading system, its pros and cons, and how to choose the best ones.

Pros and Cons of Automated Trading Systems

Traders and investors can turn precise entry, exit and money management rules into automated trading systems. It allows computers to execute and monitor the trades. One of the biggest attractions of strategy automation is that it can take some of the emotion out of trading.

Robot Trading System in stock market

Pros

Minimizes Emotions

Automated trading systems minimize emotions throughout the trading process. By keeping emotions in check, traders typically have an easier time sticking to the plan. Since trade orders are automatic once the trade rules have been successful, traders won’t be able to hesitate or question the trade.

Ability to Back-test

Back-testing applies trading rules to historical market data to determine the viability of the idea. When designing a system for automated trading, all rules need to be absolute, with no room for interpretation.

Traders can take these precise sets of rules and test them on historical data before risking money in live trading. Careful backtesting allows traders to evaluate and fine-tune a trading idea, and to determine the system’s expectancy.

Preserves Discipline 

Because the trade rules are present and trade execution is automatic, discipline is safe even in volatile markets. Discipline often gets away due to emotional factors such as fear of taking a loss, or the desire to eke out a little more profit from a trade.

Automated trading helps ensure that discipline stays put because the trading plan will be followed exactly. In addition, “pilot error” is minimized. For instance, an order to buy 100 shares won’t be incorrectly entered as an order to sell 1,000 shares.

Achieves Consistency 

One of the biggest challenges in trading is to “plan the trade and trade the plan”. Even if a trading plan has the potential to be profitable, traders who ignore the rules are altering any expectancy the system would have had.

There is no such thing as a trading plan that wins 100% of the time. Losses are a part of the game but can be psychologically traumatizing. Thus, a trader who has two or three losing trades in a row might decide to skip the next trade.

If this next trade would have been a winner, the trader has already destroyed any expectancy the system had. Automated trading systems allow traders to achieve consistency by trading the plan. It’s impossible to lay off disaster without trading rules.

Improved Order Entry Speed

Since computers respond immediately to changing market conditions, automated systems can generate orders as soon as trade criteria are met. Getting in or out of a trade a few seconds earlier can make a big difference in the trade’s outcome.

As soon as a position is entered, all other orders are automatically generated, including protective stop losses and profit targets. Markets can move quickly. It’s discouraging to have a trade reach the profit target or blow past a stop loss level. An automated trading system prevents this from happening.

Diversifies Trading

Automated trading systems allow the user to trade multiple accounts or various strategies once. This has the potential to spread risk over various instruments while creating a hedge against losing positions. What would be incredibly challenging for a human to accomplish is efficiently executed by a computer in milliseconds. The computer can scan for trading opportunities across a range of markets, generate orders and monitor trades.

Cons

Mechanical failures

The theory behind automated trading makes it seem simple; Set up the software, program the rules and watch it trade. However, automated trading is really a sophisticated method of trading, yet not infallible. Depending on the trading platform, a trade order could reside on a computer – and not a server.

What that means is that if an internet connection is lost, an order might not be sent to the market. There could also be a discrepancy in the “theoretical trades” generated by the strategy. Also, there could be discrepancy in the order entry platform component that turns them into real trades. Most traders should expect a learning curve when using automated trading systems.

Monitoring

Although it’d be great to turn on the computer and leave for the day, automated trading systems do require monitoring. This is due to the potential for mechanical failures, like connectivity issues, power losses or computer crashes, and system quirks.

It’s possible for an automated trading system to experience anomalies possibly resulting in errant orders, missing orders, or duplicate orders. If the system is monitored, these events can be identified and resolved quickly.

Over-optimization 

Though not precise to automated trading systems, traders who employ backtesting techniques can create great systems on paper. Over-optimization refers to excessive curve-fitting that produces an unreliable trading plan in live trading. For instance, it’s possible to tweak a strategy to achieve exceptional results on the historical data.

Choosing the Best Automated Trading System

When going for an automated trading platform, it’s crucial to look for some important features before you decide. Different automated trading platforms offer different services. They have their own pros and cons, might suit certain strategies and better than the others.

Choosing the Best Automated Trading System infographic

Backtesting

A backtest is a historical simulation of an algorithmic trading strategy. It sees how it would have performed on the data in the past. Backtest results usually show the strategy’s performance in terms of profits and losses and some popular performance statistics.

Hence, good backtesting software can be a great plus for an automated trading platform. Backtests has two categories ‘Research Backtesters’ and ‘Event-Driven Backtesting’.

Programming Languages

Choice of programming language is very important while deciding which platform to use for automating your trading strategy. Different languages have different pros and cons. Most commonly used programming languages used for algorithmic trading are C++, C#, Java, R, Python, and MATLAB.

Data

Different automated trading platforms provide access to/support trading/backtesting of certain securities only. For instance, there are platforms in Forex trading or Equities trading only that too in specific markets. You need to make sure what the automated trading platform offers and then decide based on your needs. The frequency of data that you would need should also be taken into account. Some strategies would require daily EOD data while some other strategies might require intraday trading data.

Web-Based Platform

Some automated trading platforms also provide the web-based platform for online trading and backtesting. That makes it easy and convenient to access your trading platform anywhere. The web-based platform may have less number of features compared to the desktop trading platform.

Online Trading Tablet

Complexity

Different automated stock trading platforms vary in ease of use. Some platforms may require actual programming expertise while others may not. Most platforms provide a demo version which can help you decide what fits your comfort level.

The complexity of platforms can be different for different assets. Also, one should check the different tools & features available to analyze the specific asset class.

Number of Strategies Allowed

Sometimes there might be restrictions on the number of long or short strategies loaded on a particular account. With that, you might need extra accounts for more strategies.

You should also check if you have enough memory on your computer for multiple accounts if required as it can be memory-intensive. Some platforms offer their own trading strategies as add-ons which can be subscribed by paying a periodic or one-time fee.

Commissions/Costs

Trading commissions can impact your profits to a great extent. Carefully choose the plan which suits your trading requirements. Also, check if there are initial and/or monthly fees; and lastly, check the offering against it to make sure you’re only paying for services which you actually want.

Technical Support & Customer Service

Automated trading platforms are likely to have an extremely high “up-time” and rarely go out of service. Before choosing the platform, you should check the history of outages. Also, check if there have been any other issues in the past, how soon were those resolved and how knowledgeable and helpful was the support team.

Bottom Line

Although appealing for a variety of reasons, automated trading systems shouldn’t be a substitute for carefully executed trading. Mechanical failures can happen, and as such, these systems do require monitoring. Server-based platforms may provide a solution for traders wishing to minimize the risks of mechanical failures.

See Also: Online Commodity Trading: What You Need to Know

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