Automated trading systems, also known as mechanical trading systems, algorithmic trading, or system trading, enable traders to establish specific rules for trade entries and exits that can be automatically executed via a computer. These systems have gained popularity, with a significant portion of shares traded on U.S. stock exchanges coming from automated trading. Traders and investors can convert precise rules for trade management into automated systems, reducing the impact of emotions on trading decisions.
The rules for trade entry and exit in automated trading systems can range from simple conditions, like moving average crossovers, to complex strategies that require programming expertise. Traders can either use platform-provided strategy-building wizards with predefined indicators or collaborate with a programmer to create custom indicators and strategies.
The advantages of using automated trading systems include:
- Minimizing Emotions: Emotions often cloud judgment during trading. Automated systems execute trades based on predetermined criteria, eliminating hesitation and emotional decision-making.
- Backtesting: Traders can test their strategies on historical data before implementing them in live trading, helping to evaluate the system’s performance and risk.
- Preserving Discipline: Automated systems follow the trading plan precisely, helping traders maintain discipline even during volatile market conditions.
- Improving Order Entry Speed: Computers respond rapidly to changing market conditions, ensuring timely order execution, which can significantly impact the outcome of a trade.
- Diversifying Trading: Automated systems can manage multiple accounts or strategies simultaneously, spreading risk across various instruments and enhancing trading efficiency.
However, automated trading systems also have drawbacks:
- Mechanical Failures: System failures, internet connectivity issues, or power losses may disrupt order execution and require constant monitoring.
- Over-Optimization: Traders may excessively refine their strategies on historical data, leading to unrealistic expectations that may not translate into live trading success.
- Scams and Misleading Claims: Traders must be cautious of scam trading systems that promise unrealistic profits and conduct thorough research before investing.
Before adopting an automated trading system, traders should consider the complexity of the system, its suitability for their goals and strategies, and the potential need for continuous monitoring. Automated trading systems can be valuable tools when used wisely but should not replace well-executed trading practices. Traders should possess adequate experience and knowledge before relying solely on automated systems for trading.