Automated trading systems, also known as mechanical trading systems, algorithmic trading, automated trading, or systems trading, allow operators to set specific rules for trade entries and exits that, once programmed, can be automatically executed through from a computer. In fact, approximately 75% of the shares traded on the US stock exchanges. USA They come from automatic trading systems.
Traders and investors can convert the precise rules of entry, exit and money management into automated trading systems that allow computers to execute and monitor exchanges. One of the biggest attractions of strategy automation is that it can take some of the thrill out of trading, as trading is done automatically once certain criteria are met.
Trade entry and exit rules can be based on simple conditions, such as a moving average crossover, or they can be complicated strategies that require a comprehensive understanding of the user’s specific trading platform programming language. They can also be based on the experience of a qualified programmer.
Automated trading systems generally require the use of software linked to a direct access agent, and any specific rules must be written in the proprietary language of that platform. The TradeStation platform, for example, uses the EasyLanguage programming language. On the other hand, the NinjaTrader platform uses NinjaScript. The following figure shows an example of an automated strategy that triggered three trades during one trading session.
A five minute chart of the ES contract with an automated strategy applied.
Establishment of trade “rules” Some trading platforms have strategy development “wizards” that allow users to make selections from a list of commonly available technical indicators to create a set of rules that can then be automatically exchanged.
The user could set, for example, that a long position trade will be entered once the 50-day moving average crosses above the 200-day moving average on a five-minute chart of a particular trading instrument.
Users can also enter the type of order (market or limit, for example) and when the trade will be triggered (for example, at the close of the bar or when opening the next bar), or use the default platform inputs.
However, many traders choose to program their own indicators and custom strategies. Often they will work closely with the programmer to develop the system. While this generally requires more effort than using the platform wizard, it allows for a greater degree of flexibility and the results can be more rewarding. Like anything else in the business world, there is unfortunately no perfect investment strategy that guarantees success.
Once the rules have been established, the computer can monitor the markets to find buy or sell opportunities based on the specifications of the trading strategy. Depending on the specific rules, as soon as a trade is entered, all protection stop loss orders, final stops and profit targets will be automatically generated. In fast-moving markets, this instant order entry can mean the difference between a small loss and a catastrophic loss should the trade move against the operator.
Advantages of automated systems
There is a long list of benefits of having a computer that monitors markets for business opportunities and executes transactions, including:
Automated trading systems minimize emotions throughout the business process. By keeping emotions under control, merchants generally find it easier to stick to the plan. Since trade orders are automatically executed once trade rules have been followed, traders will not be able to doubt or question the trade. In addition to helping traders who are afraid of “pulling the trigger,” automated trading can curb those who are prone to over-trade, buying and selling at every perceived opportunity.
Backtesting applies business rules to historical market data to determine the viability of the idea. When designing a system for automated trading, all rules must be absolute, with no margin for interpretation. The computer can’t guess, and you have to be told exactly what to do.
Traders can take these precise sets of rules and test them on historical data before risking money in live trading. Extensive testing allows operators to evaluate and adjust a business idea, and determine the expectation of the system, that is, the average amount an operator can expect to win (or lose) per unit of risk.
Because business rules are established and business execution is done automatically, discipline is preserved even in volatile markets. Discipline is often lost due to emotional factors such as fear of loss or a desire to make a little more profit from an exchange. Automated trading helps ensure that discipline is maintained because the trading plan will be followed exactly. In addition, “pilot error” is minimized. For example, if an order to buy 100 shares will not be entered incorrectly as an order to sell 1,000 shares.
One of the biggest challenges in trading is to plan the trade and trade the plan. Even if a business plan has the potential to be profitable, operators who ignore the rules are altering any expectations the system would have had. There is no business plan that wins 100% of the time.
After all, losses are part of the game. But the losses can be psychologically traumatic, so an operator who has two or three losing trades in a row might decide to skip the next trade. If this next operation had been a winner, the operator has already destroyed any expectations that the system had. Automated trading systems allow merchants to achieve consistency when negotiating the plan.
Improved order entry speed
Since computers respond immediately to changing market conditions, automated systems can generate orders as soon as business criteria are met. Entering or exiting an operation a few seconds early can make a big difference in the result of the operation. As soon as a position is entered, all other orders are automatically generated, including protective stop loss and profit targets. Markets can move quickly, and it’s demoralizing for a trade to hit the profit target or exceed a stop-loss level, even before orders can be entered. An automated trading system prevents this from happening.
Automated trading systems allow the user to trade multiple accounts or multiple strategies at the same time. This has the potential to spread risk across multiple instruments while hedging against loss of positions. What would be incredibly challenging for a human to achieve is efficiently executed by a computer in milliseconds. The computer can search for business opportunities in a variety of markets, generate orders, and monitor transactions.