What is automated trading?
Automatic trading, sometimes referred to as algorithmic trading, is a way to carry out trades using computer programmes that adhere to pre-established rules. These programs can examine enormous volumes of data, spot trends, and draw conclusions based on predetermined criteria. The beauty of automated trading is that it removes emotions from the trading equation, which is a major factor in trading success.
Automated trading is used in various financial markets, including stocks, futures, options, and currencies. With the use of automated trading systems, traders may automate every aspect of their trading process, from spotting prospective trades to carrying them out. Automated trading allows traders to save time, reduce mistakes, and grab market opportunities they might have missed.
However, building a profitable algorithmic trading system is not an easy task. It involves a lot of trial and error, programming expertise, and trading knowledge due to market volatility and the fact that what works today may not be tomorrow; even seasoned traders may find creating a profitable automated trading system challenging.
Pros & Cons of automated forex trading
- As emotional decision-makers, traders are susceptible to stress and uncertainty like humans. Fear, greed, or hope might impair a trader’s judgement, which can result in hasty or unreasonable trading decisions. On the other hand, automated trading systems closely adhere to pre-established rules and algorithms. When these regulations are encoded into the system, trades are carried out automatically and without the need for human involvement. This means that trades are executed objectively, and traders are able to avoid common emotional pitfalls such as fear of taking a loss or the desire to eke out a little more profit from a trade. This can be particularly helpful in high-stress or high-volatility trading environments, where emotions can easily get the best of traders.
- Automatic trading can also aid in avoiding overtrading, a typical mistake many traders make. Overtrading is the inclination to trade frequently or impulsively, usually in response to momentary changes in the market. By enforcing stringent trading regulations and only initiating trades when these requirements are satisfied, automated trading systems help in the elimination of this issue.
- Since computers can respond immediately to market conditions changes, automated systems can generate orders as soon as trade criteria are met. This can be crucial in volatile markets where a trade’s outcome might change drastically in a matter of seconds. By swiftly entering the trades, automated trading systems can assist traders in profiting from brief market changes and executing trades at the most favourable times. This can be especially helpful for trading strategies that depend on speed, such as scalping or high-frequency trading.
- Automated trading systems initiate trades rapidly and produce protective stop losses and profit objectives as soon as a position is taken. This reduces the danger of the market moving against traders before they have a chance to act, allowing them to control their risk and lock in profits at optimal levels.
- Automated trading systems have a much better capacity to observe several markets and spot lucrative trading opportunities than humans, who can only focus on a certain number of markets at once. Automated trading systems can identify more profitable setups and conduct trades with lightning speed by continually searching the market for trading opportunities across a variety of assets. Automated trading systems further enable traders to trade numerous accounts or different methods concurrently, aiding in risk distribution across many instruments and providing a hedge against losing positions. It would be extremely difficult for a human to complete this task well, yet a computer can do it in milliseconds with no difficulties.
- The ability to retain discipline in the face of market volatility and unforeseen occurrences is crucial to trading success. Automated trading systems ensure discipline is maintained by adhering strictly to the trading strategy without any deviations. Also, automated trading systems reduce the possibility of “pilot error,” which may happen when manually submitting orders. This is particularly important in markets that move quickly, where even a tiny error may have big repercussions.
- Keeping to the strategy despite losses is one of the hardest obstacles in trading. Trading losses may be emotionally difficult, and traders may feel tempted to go off course or forego a trade completely. However, this can undermine the overall profitability of the trading system. Automated trading systems aid in consistency by removing emotions and enabling traders to trade the plan even during challenging times.
- While it may seem like a flawless idea for a machine to make transactions on its own, technological hiccups may and do happen. A bug in the code, a network outage, or a hardware malfunction can cause a machine to malfunction, leading to lost or missed trades.
- Automated trading systems also need upkeep to keep them functioning effectively. This maintenance includes software updates, hardware upgrades, and system checks. The system may operate poorly or stop working altogether when routine maintenance is neglected.
- The fact that robots can only behave within the limits set by their programming is another problem with automated trading. As a result, the machine could be unable to adjust and continue trading according to out-of-date rules, which could result in losses if market circumstances alter in a way that isn’t taken into consideration in the software.
- Moreover, supervision is necessary to ensure the automated trading system is operating as planned and to watch for any unusual activity. While robots are quicker and more efficient at making deals than people, they are unable to think creatively or adjust to unforeseen circumstances. This implies that a human trader must be prepared to intervene and make modifications as needed.
Automated trading vs manual trading
Both manual trading and automated trading have certain benefits and drawbacks. Automated trading provides speed and consistency, as well as the ability to operate 24/7 without the need for human input. However, automated trading can also be limited by the strict pre-defined set of rules and may not be able to react to market conditions in the same way as a human trader.
Manual trading, on the other hand, offers flexibility and the capacity to adjust to shifting market conditions. Manual traders with expertise can rely on their intuition and make changes as a result of their gathered knowledge. Yet, emotions and personal prejudices can also play a role in manual trading, which can produce unpredictable outcomes.
The ideal trading strategy ultimately depends on the choices and circumstances of the trader. Manual trading may be more ideal for people who value flexibility and adaptability, automated trading is a fantastic option for those who value speed and consistency. It’s crucial to weigh the pros and drawbacks of both strategies and choose the one that best suits your trading style and objectives.
How to set up an EA for automated trading?
Setting up an Expert Advisor (EA) for automated trading requires a combination of technical and strategic knowledge. The general steps that can assist you through the procedure are listed below:
- You must first choose a trustworthy trading platform that facilitates automatic trading. Be sure the platform offers the necessary features and tools you’ll need to implement your trading plan.
- You must have a trading plan in place before installing an EA. Entry and exit criteria, risk management recommendations, and trade management rules should all be included in the plan.
- After developing a trading strategy, you can write the code for the EA. If you know how to programme, you can use the platform’s programming language to do the task yourself. Alternatively, you can hire a programmer or use a pre-built EA.
- You must backtest it using historical data to observe how the EA works in various market scenarios. Based on the findings, you can modify the EA’s settings to enhance performance.
- After the EA’s performance has met your standards, you may install it on your trading platform and begin trading. To make sure it keeps working at its best, you must routinely check its performance and make modifications as needed.
How is automated trading different from manual trading?
Automated trading uses computer algorithms to analyse data, identify opportunities, and execute trades, while manual trading relies on human traders to make decisions based on their own analysis and judgment.
What programming languages are commonly used in automated trading?
Some of the most common programming languages used in automated trading include Python, C++, Java, and R.
Can automated trading be used for long-term investing, or is it better suited for short-term trading?
Automated trading can be used for both long-term investing and short-term trading, depending on the strategy and goals of the trader.