Table of Contents
- 1 Understand How Automated Trading Has Paved A Path For Innumerable Opportunities, Read On To Know More
Understand How Automated Trading Has Paved A Path For Innumerable Opportunities, Read On To Know More
Automated trading systems, commonly referred to as mechanical trading systems, system trading, or algorithmic trading enables traders to establish specified rules for both trade entries as-well-as exits that, once programmed, can be automatically executed via a computer.
About 75% of shares traded on U.S. stock exchanges are executed from automatic trading systems.
Traders and investors can transform precise entry, exit, as-well-as money management rules, all into automated trading systems that enable computers to execute and review the trades.
One of the biggest pros of implementing automation in trading is that it can eliminate some fraction of emotion from trading, considering trades are automatically placed as soon as specific criteria are met.
The trade entry and exit rules are typically based on conditions that include a moving average crossover.
However, some complicated strategies demand a comprehensive knowledge of the programming language, which might be specific to the user’s trading platform.
Automated trading systems require the use of software that is linked to a direct access broker, and any particular rules need to be written in that platform’s designated language.
Increasing Opportunities Via Automated Systems
There are a ton of advantages and ways in which automated systems have reshaped the trading platforms.
Here are mentioned some of the benefits that automated systems have offered in the domain of trading –
1. Alleviating Emotions
Automated trading systems help mitigate emotions in the trading process. By keeping emotions under control, traders often find it easy and convenient while sticking to the plan.
Since trades are executed automatically as soon as the trade rules are met, traders cannot hesitate or question the executed trade.
Not only does it assist traders who fear “pulling the trigger,” but automated trading also curbs those who might recklessly overtrade, i.e., people who would buy and sell at every potential opportunity.
Backtesting implements trading rules to historical market data to calculate the viability of an idea. When constructing a system for automated trading, all rules are required to be absolute, with no space for interpretation.
The computer doesn’t make guesses and has to be told precisely what to execute. Traders can consider these specific sets of rules and try them on historical data before risking capital in live trading.
Careful backtesting facilitates traders to review and fine-tune a trading idea, and to extrapolate the system’s expectancy, which is nothing but the average amount a trader can anticipate to gain or lose per unit of risk.
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3. Maintaining Discipline
Since trade rules are well-established and trade execution is performed automatically, the preservation of discipline stays reinforced even in volatile markets.
Traders can easily lose disciple due to emotional factors that include fear of incurring a loss or the desire to squeeze out a tad more profit from a trade.
Automated trading ensures discipline is strengthened because the trading plan shall be followed as per mentioned. Often, humans can stagger from their decided path due to the breakdown of their discipline threshold.
Also, “pilot error” is mitigated as well. For instance, an order to purchase 200 shares cannot be incorrectly fed in as an order to sell 2,000 shares.
Probably one of the greatest challenges in trading is to meticulously plan the trade and trade the plan.
A trading plan might have the potential to be profitable; however, traders who overlook the rules are modifying any expectancy the system could have had.
No trading plans have a 100% success rate at any time. Incurring losses are a part of the trade just as gaining profits.
However, losses can be psychologically traumatizing; therefore, a trader with two or three consecutively losing trades might intend to skip the next trade.
If this next trade were to be a winner, the trader already would’ve sabotaged any expectancy the system could’ve had. Automated trading systems enable traders to master consistency by trading the plan.
4. Enhancing Order Entry Speed
Since computers respond instantaneously to mercurial market conditions, automated systems have the capability to generate orders just after the trade criteria are met.
Entering or exiting a trade a couple of seconds earlier can cause a big difference in the trade’s final output.
Just after a position is entered, all other orders are generated automatically, which include protective stop losses as-well-as profit targets.
Markets can change quickly, and it can be demoralizing to have a trade hit the profit target or blow past a stop-loss level, even before the orders can be entered.
An automated trading system inhibits such an issue from occurring.
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5. Diverse Trading
Automated trading systems facilitate the user to trade using multiple accounts or various strategies at the same time.
This has the latency to distribute risk over various instruments while forming a hedge against losing positions.
Tasks that might be incredibly challenging for a human to execute is proficiently performed by a computer in a fraction of a second.
The computer can scan for trading opportunities across a range of markets, generate orders, and monitor trades.
6. Server-Based Automation
Traders cannot just run their automated trading systems using a server-based trading platform.
These platforms often offer commercial strategies for sale for traders to design their systems or the capability to host existing systems on the server-based platform.
For a specified fee, the automated trading system can scan, execute, and even monitor trades, with all orders staying on the server. This results in potentially quicker, more reliable order entries.
With the advancements in technology, now trading can be left for the computers to execute, considering they have better logical skills.
Server-based platforms can provide a solution for traders who wish to alleviate the risks of mechanical failures.
However, automated trading is extremely reliable and has created innumerable opportunities for the enthusiastic traders out there, especially those who might not have very good control over their emotions.
Remember, you need to have some trading experience and some knowledge before you choose to employ automated trading systems to perform everyday trades online.