Manually setting trade strategies and doing real-time trades requires a lot of effort and is also time-consuming. But, with the advancement in technology, automated trading systems or bots have come up that handle the entire trading process and take trading to the next level.
Are these systems really worth it? Can you trust and hand over your trading strategies to a bot? Dive right into this article and find out what automated trading systems are, how they work, and their main advantages and disadvantages.
What Is An Automated Trading System And How Does It Work?
An automated trading system or automated trading also referred to as algorithm trading, mechanical trading, or system trading, is a system that uses automated trading software to manage the whole trading process. This system is integrated with mechanical trading tools and advanced algorithms that explore profitable trading opportunities in the market.
Automated trading systems allow traders to form certain strategies and parameters for entries and exits. These rules created based on time, volume, and price are pre-programmed and fed into the system so that it automatically executes the orders.
Automated trading systems utilize advanced, data-based algorithms to open, manage, and close trade positions for you. As mentioned before, you can set the price entry, exit, and investment rules based on market conditions such as moving average crossover, stop-loss, specific price, and so on. That being said, some expert traders set rules by employing complicated strategies. Anyway, once the rules are set, the system will begin running and accomplish orders at high rates.
Pros Of Automated Trading Systems
Automated trading systems come with several advantages that help level up trading experience. Here are the pros of these systems:
- Increases order entry rates
Once the trade criteria have been set by the trader, automated systems will immediately respond to the market conditions and execute orders with speed and accuracy. The timing of entering or exiting trades is crucial and different orders are generated quickly once a position is entered. These include profit targets and protective stop losses. Automated trading lets you use a range of strategies and trade using multiple accounts.
- Avoids emotions
Another major advantage of using automated trading systems is that they minimize emotions while trading. Often, human emotions are the cause of losses and professional investors avoid them so that they can easily stick to the strategies and execute trade goals. As it is automated, there is no option for having second thoughts. With very low human interference, traders can execute profitable trades and raise the overall profit margin.
- Backtesting
Yet another important feature of automated trading is its capacity to apply specific trading rules to historical market data collected. This ability of the system helps test the viability of a strategy. So, whenever traders set strategies for trading, the automated system checks them carefully before executing the ores. With such a feature, traders and investors can reduce the chance of unsuccessful orders.
- Diversifies trading
Diversification is the next advantage offered by automated trading systems. With this feature, traders can use different strategies at the same time and also use multiple trading accounts. As a result, the risk across asset classes gets split between various instruments, and the possibility of losing positions goes down. So, traders and investors can experience a rise in profit margins.
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Cons Of Automated Trading Systems
Here are some of the drawbacks of automated trading systems that you should be aware of:
- Over-optimization
The first step in automated trading is that traders have to manage and generate trade strategies. The rules set using backtesting might look good on paper but when used in live trading, they might backfire and lead to huge losses. So, over-optimization of trade strategies might result in plans that are unreliable in real-time trading.
- Mechanical or technical failures
Mechanical failures are something that all traders and investors should keep in mind. Though automated trading might seem simple in theory, the whole process is really complicated. Once you set the rules and wait for the order to be executed, note that these reside not on the server but on the computer. This means that if there are any technical failures like an unstable internet connection, the order will not be executed and might end up in losses. So, it is always better, to begin with small amounts.
- Monitoring
Automated trading systems don’t mean that they require zero monitoring. Monitoring is a must to identify technical failures that might result in duplicate orders, errand orders, or missing orders. If there is no proper monitoring, it might result in huge losses.
Final Thoughts
Automated trading systems are a good alternative to trading methods of trading. But, this doesn’t mean that they do not have any downsides. Having sound trading knowledge and monitoring order executions is crucial to achieving profitable trades. So, before using automated trading systems, carefully analyze all the pros and cons and then begin by investing in small amounts. Once you get a clear idea of the system and the whole process gets refined, you can carry out successful trades.
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