Automated Trading Systems and How to Use Them

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September 8, 2021 Business

What are automated trading systems?

Sometimes referred to as trading robots, automatic trading systems refers to an alternative to trading that requires minimal human intervention. It is a way of participating in financial markets using a programme or software that reacts to financial markets based on a set of predetermined inputs, making it a very routine and standard way of trading. The inputs that are involved generally relate to guiding the system on the entry and exit points.

Some have championed this option over human participation in the market because it eliminates factors such as fear, greed, hesitation and acting on impulse, which some traders have succumbed to. However, as much as automated trading systems take the emotion and lack of discipline out of trading, there are also negatives to automated trading systems, the main one being that they fail to effectively respond to unprecedented market activity because they have predetermined inputs. This, in turn, could lead to the trader missing out on a potentially lucrative market fluctuation.

How to use them

Automated trading systems allow one to carry out many trades in a relatively small period of time, making it that much more time efficient. To get started, you have to first choose the platform that you want to use, and then follow that up by setting the parameters to guide the entry and exit points. This is informed by your trading strategy of choice. Thereafter, based on your trading knowledge, understanding and experience, you will create a set of rules for the system to adhere to or trade according to. Based on this, the system will then monitor the financial market prices and react to them based on the predetermined parameters. As already alluded to, automated trading systems have proven to be more efficient and faster than human trading in some cases. When it comes to stock trading, traders do have this option as well, as they can run their automated trading systems through a server-based platform, therefore, those that are familiar with the FTSE 100 and other popular indices trading can also explore this alternative.

Benefits of automated trading systems

Experienced traders have voiced their thoughts on the benefits of using automated trading systems. These include, but are not limited to:

Efficiency and reliability

This includes the time factor mentioned above and the fact that they are reliable and lack no discipline. For example, while a person might set out a trading strategy and guide, a lack of discipline during open trading hours could make all their plans futile. An automated system, on the other hand, will trade as programmed with no disruptions.

Disregard of human flaws or emotions

Emotions and human flaws such as impulsiveness, pride, ego, fear, greed and hesitation could lead to one missing an opportune trading moment, however, because automated systems are inhumane, this is not a cause for concern. One could argue that automated systems are more dependable to execute the strategy as is because of this, unlike humans.

Consistency

This ties in with the discipline aspect, while a person might not feel like trading or paying close attention to the markets on certain days, automated systems are consistent in their trading.

Decisiveness

Automated systems trade based on the predetermined inputs, therefore, they are decisive from the start. Where humans may doubt themselves or reconsider certain moves, automated systems do not.