Advantages of Automated Trading Systems
The Pros And Cons Of Automated Trading Systems
By Jean Folger
September 11, 2014
Traders and investors can turn precise entry, exit and money management rules into automated trading systems that allow 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 since trades are automatically placed once certain criteria are met. This article will introduce readers to and explain some of the advantages and disadvantages, as well as the realities, of automated trading systems. (For related reading, see The Power Of Program Trades.)
What Is An Automated Trading System?
Automated trading systems, also referred to as mechanical trading systems, algorithmic trading, automated trading or system trading, allow traders to establish specific rules for both trade entries and exits that, once programmed, can be automatically executed via a computer. The trade entry and exit rules can be based on simple conditions such as a moving average crossover, or can be complicated strategies that require a comprehensive understanding of the programming language specific to the user's trading platform, or the expertise of a qualified programmer. Automated trading systems typically require the use of software that is linked to a direct access broker, and any specific rules must be written in that platform's proprietary language. The TradeStation platform, for example, uses the EasyLanguage programming language; the NinjaTrader platform, on the other hand, utilizes the NinjaScript programming language.
Some trading platforms have strategy building "wizards" that allow users to make selections from a list of commonly available technical indicators to build a set of rules that can then be automatically traded. The user could establish, for example, that a long 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 input the type of order (market or limit, for instance) and when the trade will be triggered (for example, at the close of the bar or open of the next bar), or use the platform's default inputs. Many traders, however, choose to program their own custom indicators and strategies or work closely with a programmer to develop the system. While this typically requires more effort than using the platform's wizard, it allows a much greater degree of flexibility and the results can be more rewarding. (Unfortunately, there is no perfect investment strategy that will guarantee success. For more, see Using Technical Indicators To Develop Trading Strategies.)
Once the rules have been established, the computer can monitor the markets to find buy or sell opportunities based on the trading strategy specifications. Depending on the specific rules, as soon as a trade is entered, any orders for protective stop losses, trailing stops and profit targets will automatically be generated. In fast moving markets, this instantaneous order entry can mean the difference between a small loss and a catastrophic loss in the event the trade moves against the trader.
Advantages of Automated Trading Systems
There is a long list of advantages to having a computer monitor the markets for trading opportunities and execute the trades, including: