What is an automated trading system?
Even before the expansion of artificial intelligence, automated systems were already being utilized in the trading world. These systems, whether through robots or software, enable trades to be executed automatically. Importantly, these are not just programmed trades with fixed levels for pending orders; rather, they respond to established parameters from technical indicators or other variables, incorporating rules and filters as well.
This has revolutionized the trading landscape, creating an industry within an industry and providing traders with entirely new ways to operate compared to traditional methods.
What is automated trading?
In simple terms, automated trading involves using a program that executes trades based on predetermined entry conditions. Automated trading systems are often referred to as mechanical trading systems, algorithmic trading or system trading. They enable traders to set precise rules for both entering and exiting trades. Once these rules are programmed, they can be executed automatically by a computer.
Year after year, the volume of operations conducted through automated trading has consistently increased. The advancement of technology, the growing accessibility of trading programs, the rise of cryptocurrencies and other factors contribute to the expansion of tools available for automated trading.
Building your system
There are alternatives for conducting automated trading. Many trading platforms feature strategy-building tools that allow traders to select from a list of technical indicators to create a set of rules for automated trading. For instance, a trader could specify that a long position will be initiated when the 50-day moving average crosses above the 200-day moving average on a thirty-minute chart, provided that Momentum is above 100. The first part would be the entry rule, and the second part, a filter. The system can also include money management rules.
Moreover, some professional traders have created automated systems based on economic indicators and news, or correlations, often collaborating with a developer to create a tailored system. These systems are proprietary trading tools developed by these traders and usually rely on advanced technology. This is just one example of the potential of automated systems. In combination with high-frequency trading, a significant portion of intraday operations in financial markets are automated.
Regardless of the automated system, the foundation remains the same. Rules are established, and the software continuously monitors the market for buy or sell opportunities based on the established strategy. As soon as a trade is executed, any associated orders—like stop losses or profit targets—are automatically generated.
To use an automated trading system, it is typically necessary to employ software linked to a direct-access broker. The rules must be written in that platform's language.
Main benefits of automated trading
Schedule flexibility: Automated trading provides flexibility, allowing traders to align their trading activities with any schedule, executing trades day or night without manual intervention.
Reduction of emotions and impulses: A planned strategy executed automatically reduces the risk of impulsive trades and minimizes emotional reactions that can significantly impact trading decisions.
Discipline: Automated execution fosters discipline by preventing discretionary trades and ensuring adherence to established rules even in volatile markets.
Simultaneous execution: It is possible to conduct multiple trades in real-time without needing to execute them manually, which could be impossible otherwise.
Diversification: The ability to conduct multiple trades simultaneously, as well as manage various accounts and strategies, facilitates diversification.
Backtesting: Traders can apply their rules to historical data to assess their viability before risking real capital, allowing for adjustments and optimizations based on past performance. For example, the MetaTrader 4 Strategy Tester is used to test and optimize trading robots before real trading. It utilizes historical quote data to analyze how the trading robot would have performed in the past.
Entry speed: Computers can react faster to market changes, potentially leading to better entries or exits in trades.
These are just some of the potential advantages of automated trading. It is important to note that no system guarantees positive results, as even a good strategy may cease to work due to changes in market conditions. Historical performance can inform strategies, but there are no guarantees that past behavior will repeat. There is also the technical risk, which can lead to erroneous trades or overtrading, resulting in significant capital loss. No strategy or system is without risks. There is no perfect strategy that guarantees success.
Automated trading requires substantial effort. The initial phase involves developing rules, setting up the mechanical system, testing it and adjusting parameters before trading live. However, the work does not end there; monitoring is necessary—not only to ensure that automated trades are executed as configured and desired, but also to review results and make necessary adjustments. It's essential to understand the conditions under which the system might not deliver the expected results, such as during market volatility, allowing the trader to adapt the rules to changing circumstances.
Best automated trading system platforms
The main types of trading software suitable for beginners are:
Strategy builders: Strategy builders: These platforms allow beginners to create and test strategies without requiring coding knowledge. They often include visual interfaces and pre-designed templates, making it accessible for those new to trading.
Copy trading systems: Ideal for those who prefer to replicate the strategies of experienced traders, these systems make it easier to learn while potentially earning profits.
Platforms for automated trading
ProRealTime: It offers assisted creation tools that allow you to construct both simple and complex strategies without requiring any coding skills. ProRealTime offers an intuitive backtesting suite that enables you to evaluate your system effectively. With over 100 indicators available, the platform is tailored for both novice and seasoned traders.
MetaTrader 4 (MT4): You can design your expert trading algorithms, develop indicators and execute a variety of orders. Furthermore, you can import Expert Advisors (EAs) created by other traders. These EAs can notify you of trading opportunities or automatically execute trades on your behalf.
MetaTrader 5 (MT5): This platform accommodates a diverse array of trading strategies and numerous bots, making it proper for both beginners and advanced users.
APIs: Develop your own trading platform and craft sophisticated trading solutions from the ground up using APIs. This option allows you to program your algorithms entirely, ensuring orders are executed with top-tier technology for optimal performance.
Darwinex: This platform is distinguished by its innovative risk management features and investment funding options. It is a highly rated automated trading platform that facilitates trading across various assets, including Forex and stocks.
Interactive Brokers: Providing a suite of advanced tools and features, this platform may appear complex to beginners. However, it remains a widely used trading platform for bots, offering advanced risk management tools and access to an extensive range of markets.
TradeStation: Renowned for its powerful automated trading functionalities, it provides a strategy-building tool that enables users to create, test and refine their trading strategies using historical data. The platform also boasts a broad selection of technical indicators and in-depth market analysis resources.
NinjaTrader: This is a favored option for futures and Forex trading, featuring advanced charting functionalities and a user-friendly interface for automated trading strategies. The platform also offers backtesting and simulation capabilities.
eToro: Well-known for its social trading features, this platform allows users to replicate the trades of successful investors, creating a unique learning experience while participating in the market.
How to start using automated trading systems
Automated trading systems can provide a streamlined approach to trading, enabling you to execute trades based on predefined parameters without the need for constant manual intervention. However, before venturing into the realm of automated trading, it’s crucial to consider several factors to ensure you are adequately prepared.
First, reflect on whether automated trading is the right choice for you. While there are enticing promises of profit, success—like in traditional trading—requires effort and time. Assess whether you might be better off trading manually, especially if you lack experience with complex systems.
Understanding the intricacies of the automated trading system is essential. Simplifying your goals and strategies from the beginning can help you avoid confusion as you learn. There is no universal approach; you need to establish your strategy, identify the assets you wish to trade and determine the level of customization needed for your specific situation and objectives.
While "automation" may suggest simplicity, there are several important considerations to keep in mind before you start using these systems.
Automated trading involves using algorithms or rules to execute trades based on specific predefined conditions that trigger actions when met. The functionality, construction, coding and other factors depend on the platform and the type of strategy you choose. Generally, the steps to follow include:
Choose a platform: Select a trading platform that supports automated trading and aligns with your needs.
Set parameters: Define your trading strategy by establishing clear rules and conditions. For example, a rule might be to "sell 2 lots of EUR/USD when its 50-day moving average falls below the 200-day average, provided it is not in overbought territory, as measured by the RSI."
Test your strategy: If you’ve chosen a platform that allows you to test strategies without risking real money, take advantage of this feature before committing to real capital. Testing will help you evaluate the strategy under various market conditions.
Manage risk: In your strategy, also define the lot size. Risk management is a critical component that can determine the success or failure of a strategy. You should exercise the same caution and care as you would in manual trading. Many systems even allow for the inclusion of risk management rules.
Execution: Your custom algorithm will continuously monitor the market and execute trades automatically when the predefined conditions are satisfied. It will also place stop-loss and take-profit orders that will be executed automatically based on your specified rules.
Monitor: You need to monitor your trades primarily to detect any technical errors. Additionally, it’s essential to analyze the results of the trades and their relationship to market movements. Identifying when the system is no longer reliable is crucial, as this may necessitate adjustments or even the discarding of the strategy.