Automated Trading - What, How, and Why?

Automatic trading is a very useful addition to the trader’s arsenal. Back in the 2000s when trading just became available for average people with the development of the MetaTrader 4 platform there were not many options to automate the process.

Now, there are a number of already available preset scripts as well as a possibility to create your own to make automated trading decisions so that there is no need to sit next to the computer staring at the charts all the time.

What?

The whole point of this endeavor is to make it easier and more efficient to trade on different markets like foreign exchange market (Forex, FX), commodities, cryptocurrencies, precious metals, etc.

All of these are quite a risky affair on their own and the scripts running rampant without supervision may result in bigger losses than otherwise. Automated trading systems are also referred to as algorithmic trading or systemic trading. They allow the traders to set up specific rules for the scripts to do both trade entries and exits independently.

It has become so popular that trading platforms are reporting more than 70 to 80 percent of trading happening utilizing such programs. As of now, computers running these scripts are automatically watching out for price fluctuations and decide when to specifically enter or exit the trade. Sometimes they are even set up with money management rules. This takes out the human factor and basically removes emotional trading from the equation. The scripts are relentless. They do not rest, go for lunch, go to the bathroom, or sleep. 

Once the world started to globalize using the internet everything became much more intertwined.

Not only can traders write their own unique scripts for platforms like cTrader that offer strong C# based script editor, but they can also try to use one of the already available programs that are provided by different broker firms and sometimes even platforms themselves.

These programs can review the historic price data as well as market conditions and understand how well their decision would stand the previous situations as well as do live trading results with simulated testing such as using demo accounts. This is an extreme shortlist and the possibilities are basically endless. Apart from that the millisecond, spot-on, and precise decision-making is giving the traders a number of advantages over the ones who do not use these systems and resort to doing the trading by hand.

How?

As we have already mentioned, traders set up their scripts to automate the whole trading process. This means that they are making custom trading rules for the robots to abide by.

There are a number of strategy-building applications that help users in making a selection from the most common choices that other traders are utilizing. Apart from this, there are a number of technical indicators that can help you build your own unique rules. 

The rules can be anything starting from when to enter a trade or when to exit. For example, the trader can decide to make a script that will open a long position once the 30-day moving average surpasses something like the 150-day moving average on the five-minute chart.

Another thing that users can do is to input the limit order or market order and the trade will be triggered once the bar closes or will be close to the opening of the next one.

More tech-savvy traders will often develop their own scripts or hire a professional programmer to do it for them. This is a much more expensive and time-consuming matter, however, the custom rules that one sets up can give a significant advantage over the other “default” rules set using preset applications.

One thing worth mentioning is that there is no perfect investment strategy that will work all the time to generate passive income why the trader is chilling somewhere in the living room. These scripts require just as much attention to constantly modify the rules. Imagine a battlefield in real life, as Napoleon has said “No plan survives contact with the enemy.”

Trading works in much the same way since there is no one plan that you can use that will work all the time. The rules for automated trading require constant tweaking and modification to adjust to the new market movements, strategies, and most important goals of the trader.

Why?

The advantages of automated trading are practically endless. We have shortly discussed these in the “What?” section of this article but let’s extend that thought even more now. Some of the most common advantages are:

Backtesting

The computer requires exact directives on what to do. This means that the rules have to be as clear as possible. Testing is a vital part of this process as improperly done scripts may give much more headache than the benefits.

Backtesting means that the script can actually process the historical market data and determine the viability of the decision to open or close the trade by comparing it to the previous scenarios and “test” how it would have worked if it was done at that time.

This enables the traders to take their precise set of rules and apply them to previous scenarios to see how they would have fared. This allows traders to basically bug test their programs and fix the issues before actually launching the script to make financial decisions.

This also allows them to set up proper expectations for the script like how much revenue will there be? Or how much loss if things go sideways (which happens all the time)?

No Emotional Trading

This is something we have already mentioned previously but needs to be reiterated because it is one of the biggest problems of human traders. Our emotions are one of the safety mechanisms implemented by our brains to keep us safe during times of crisis.

Fear means that the brain believes us to be under threat and wants us to get away, happiness is when we believe that we are succeeding in something. It helps enhance our emotions and make things that much more enjoyable.

However, during the process of trading, they are much more of a hindrance rather than an addition. The fear of making a wrong decision is always going to be sitting somewhere at the back of your mind.

Apart from this, the happiness that one may get from what seems like a good decision may lead the user to overconfidence and overextension by default meaning that from a winning position they may end up losing money if the market movement suddenly changes.

Order Entry Speed

Even if it was Bruce Lee, with his lifelong training of reaction timings, sitting at the computer trying to make a trade based on his reaction timing he still won’t be anything in comparison to an ordinary $300 computer that you can get in Walmart.

While the latter may seem cheap and slow to your tower sitting in your office it is still much faster than a human can ever be. The scripts have the ability to make millisecond-perfect decisions. This means more revenue and potentially less loss when the time comes.

Diversity of Trading

Automated systems allow users to utilize a number of different accounts and strategies at the same time. The diversification of trading assets over various instruments while having some kind of hedge in case the position starts to spiral will give the ability to lower the risks significantly.

Bottom Line

The bottom line of this article is that automated trading is an extremely powerful tool under the supervision of an able trader. It is something that every professional trader or investor should aspire to integrate into their trading arsenal one day or another. However, it is also not a perfect solution for everything.

When using algorithmic trading one has to look out for mechanical failures that can easily happen at any point. It also doesn’t mean that the trader can just leave the computer to do as it will while procrastinating somewhere on the beach.

The tech requires constant monitoring of its functionality and augmentation of its existing rules as well as the creation of new ones. It is also worth noting that the performance is heavily dependent on the ability of a trader to set up proper rules. If the latter is not done well the result may be a huge financial loss.