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Automated Trading Systems: Everything You Need To Know

Many people are turning to automated trading systems to enable them to make trades faster and more efficiently than ever before. But how effective is automated trading and how do you decide whether it’s right for you?

In this article, we’ll explain the ins and outs of automated trading systems, helping you to decide which path to take into trading.  

Tell Me More About Trade Bots

Trade bots might sound highly technical and futuristic, but really they’re just a piece of computer software which can be programmed to act on your behalf. These automated trading systems are given pre-defined rules for entering and exiting trades, including parameters for orders to open, trailing stops and guaranteed stops.

Your automated trading system will then manage your trades from start to finish, allowing you to spend less time monitoring. This means that you’ll be able to make more trades in a shorter timeframe, whilst taking the emotion out of trading.  

Read on to learn how trade bots are used to execute trades and automate trading activity.

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How Does Automated Trading Work?

Automated trading systems operate using a set of pre-defined rules and parameters which are set by the trader. The rules set will depend on the trader’s individual trading strategy and the level of risk that they determine acceptable.  

Rules will usually be set to determine the timing of the trade, the price at which it will be opened and closed and the quantity which will be purchased or sold. For example, you might set a rule to ‘buy 100 BT shares when its 50-day moving average rises above its 100-day average’.

The trade bot will then continuously monitor the stock market, executing trades if the pre-defined conditions are met. This allows traders to place trades faster than ever before and to take advantage of market events.

How does automated trading work

What Can You Trade Through Automated Trading?

You can use an automated trading system to trade just about anything. This includes:

  • Stocks
  • Forex
  • Options
  • CFDs
  • Futures

The automated trading system that you choose may determine what you are able to trade, so it’s a good idea to check which types of trading your bot allows before choosing a system.

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How Are Rules Established?

So, we now know that automated trading systems rely on pre-defined rules, conditions and parameters to operate. But how are those rules established?

Ultimately, this depends on the automated trading platform chosen, as well as the trader’s personal choice. Some trading platforms have in-built strategy “wizards” which allow traders to choose from popular indicators to build a set of rules.

However, the majority of traders prefer to programme their own parameters based on their personal trading strategy. This may involve working directly with a programmer to develop an algorithm which matches their trading strategy. Although this requires time, effort and money, it also enables more flexibility and tailored results.

After the rules and parameters have been defined, the automated trade bot can then monitor the markets and look for opportunities which fit the trading strategy. Instantaneous order entries can then be made when triggered, speeding up trading and helping to ensure accuracy for the trader.

Pros And Cons Of Automating Trading

Like with any type of trading, there are many benefits and risks of using an automated trading system. These should be carefully weighed up before making a decision regarding the best type of trading for your personal circumstances.

Let’s take a look at some of the pros and cons of automating your trading.

ProsCons
✅ Eliminates emotional trading❌ Technical failures
✅ 24/7 trading❌ Over-optimisation
✅ Expand into new markets❌ Requires monitoring
✅ Improved order entry speed❌ Lacks human intuition
✅ Backtesting❌ Success isn’t guaranteed

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Pros and cons of automated trading

Advantages Of Automating Trading

There are many advantages of using an automated trade bot to facilitate trading. Here are some of the benefits of automated trading.

Take The Emotion Out Of Trading

Many traders have experienced emotional trading. Whether it’s hesitating a bit too long to place a trade or attempting to claw funds back after making a loss, it can be hard to ignore your emotions at times.

Trade bots don’t have emotions, so they stick to the plan without the interference of emotions. As trade orders are automatically executed when conditions are met, traders don’t have time to hesitate or question the trade. This helps to eliminate emotional trading, keeping your strategy based on logic and facts.

Trade 24/7

Even traders need to sleep, which can sometimes be difficult if you’re worried about missing out on trading opportunities. When you use an automated trading system, there’s no need to worry about missing out on trades as your trade bot will be monitoring the market on your behalf. So, you can put the FOMO to one side and get on with your life – whether it’s sleeping, working or spending time with your family.

Expand Into New Markets

Utilising automated trading can allow traders to expand into new markets. This could be a market which is in a different time zone which would usually be impossible to trade within due to the time differences. The trade bot is able to scan for trading opportunities across a range of markets, taking advantage of any opportunity within changing markets.

Improved Order Entry Speed

Sometimes, a few seconds can make a huge difference to the outcome of a trade. Using an automated trading system can give you the advantage of those few seconds, allowing your trading orders to be placed instantaneously in response to changing market conditions. As soon as your trading criteria are met, the order will be generated, taking advantage of the market conditions. This can help you to avoid missing out and enhance the success of your trades.

Make Use Of Backtesting

Some automated trading systems will allow traders to utilise backtesting to determine the viability of ideas before setting parameters. Backtesting enables a trader to apply their rules to historical market data to evaluate the results before risking their money in live trading. This can help traders to fine tune their trading strategies to increase their potential successes.

Disadvantages Of Automating Trading

Despite the advantages of automated trading systems, there are also a few risks that you should be aware of when considering whether to automate your trading. Here are some of the disadvantages of using an automated trading system.

Be Prepared For Technical Failures

Automated trading systems follow a simple principle: you simply set up the software, define the parameters and allow it to make trades on your behalf. However, like any computer, trade bots don’t always get it right.

For example, if an internet connection is lost, a trade order might not be sent to the market, missing out on a crucial opportunity. This means that you could find yourself with a discrepancy between the theoretical trades generated by your trading strategy and the actual trades executed.

Over-Optimisation Is Real

Picture the scene: you spend hours carefully fine tuning your trading system using backtesting techniques. It looks great on paper and you’re confident of its success. However, a trading strategy which has been refined to produce exceptional results based on historical data won’t always perform well in a live market. This is because it has been refined to match past data exactly.

It’s important to be aware that a good trading strategy won’t have a 100% success rate as the market will never be linear. A seemingly perfect plan which has been tailored to match historical data could fail when it enters a live market.

Monitoring Required

Despite the word ‘automated’ appearing in the name, automated trading systems do still require careful monitoring. This is because technology issues such as power losses, connectivity issues and computer crashes can interfere with your results.

Any technology failure could result in an anomaly that leads to missing or errant orders, as well as duplicate orders being placed. By continuously monitoring your automated trading system, you can limit the damage caused by technology failures and quickly resolve any issues.

Lacks Human Intuition

Whilst removing emotions from the trading process can help to avoid emotional trading, emotions do sometimes give traders an advantage over trading bots. An automated trading system is programmed to follow its algorithm exactly, applying no external thoughts or logic to the process.

This lack of human control means that the trader is not able to make discretionary choices. Even if the trader believes that a strategy won’t work in a particular scenario, they won’t have time to adjust the algorithm and abandon the trade. If the programme runs in a direction that the trader disagrees with, there is no way to stop it.

Success Isn’t Guaranteed

Like with any type of trading, success isn’t guaranteed by using an automated trading system. Whilst it can feel like your algorithm is taking care of the trades, that doesn’t always mean that it will be successful. Without the element of human control, it’s easy to wonder if there is something that you could have done better through traditional trading.

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Things to know before using a trade bot

What Should You Know Before Automating Your Trading?

Enlisting the help of an automated trading system can make it feel like you’re simplifying trading. However, there’s a few things to consider before you decide to automate your trading.

Firstly, consider whether an automated trading system is really right for you. These systems can take a considerable amount of time to set up and to refine the algorithm to match your trading strategy. You’ll then need to continue to refine your algorithm over time, as they have a relatively short lifespan due to changing market conditions.

Automated trading systems are also complex. If you don’t have experience in programming, you may find that you lose out by making mistakes. It’s important that you know exactly what you’re getting yourself into and understand the ins and outs of the trade bot before beginning to use it.

You’ll need to begin with a simple trading strategy before advancing to more complex strategies. There’s no one-size-fits-all approach and it can take some trial and error to get it right, especially at the beginning.

Is Automated Trading Right For Me?

Using an automated trading system isn’t right for everyone. These systems apply a strict set of rules, conditions and parameters to the market to automatically make trades, removing the emotion from trading. This can be appealing for those who are prone to making emotional trades.

Despite the seemingly low maintenance approach to trading, automated trading systems require careful monitoring to ensure that technological failures don’t influence your trading strategy. You’ll need to carefully weigh up the pros and cons of automated trading to establish whether the technique is right for you.

Using An Automated Trade Bot For Copy Trading

If the idea of using an automated trading system appeals to you, but you don’t want to spend time writing algorithms, copy trading could be an appealing alternative.

Copy trading involves mimicking the actions of a more established trader, benefitting from their experience whilst earning your own passive income. You can combine copy trading with an automated trade bot to automatically place trades alongside your chosen trader.

You can also opt to use a signal service which sends you an alert when your chosen trader performs a trade. This is a great way to build up your own experience in trading and learn about the markets.

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Related Questions

Do Automated Trading Systems Work?

If used correctly, automated trading systems can be very successful. However, you’ll need to carefully tailor the algorithm to match your trading strategy and carefully monitor the system in case of any technical failures. If the algorithm isn’t set up properly, you could end up making poor trades and losing money.

Is Automated Trading Profitable?

Automated trading systems do not guarantee profits. However, a well thought out algorithm with carefully selected parameters will have the potential to be profitable. It’s important to remember that as with any type of trading, profits and not guaranteed and your capital could be at risk with automated trading.

Are Trading Bots Legal?

Automated trading systems are perfectly legal and above board. Whilst some people do have objections to trade bots, there are no laws or rules in place which prevent traders from using automated trading systems. However, it’s important to ensure that the platform you choose is both reliable and trustworthy, as there are many scam sites out there.

Should You Use An Automated Trade Bot?

The choice of whether to use an automated trading system is completely personal, so it’s down to the individual trader to weigh up the benefits and risks of using such a system.

For some traders, using an automated trade bot simplifies the process of trading, allowing them to place a greater volume of trades efficiently and profitably. However, it’s important to remember that using an automated trading system comes with risks, and it isn’t for everyone.

Copy trading is an appealing alternative to using an automated trade bot, allowing traders to create a passive income stream by following the trading actions of a more established trader. This allows traders to take a hands-off approach to trading, whilst profiting from the success of an experienced trader.

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I’m Jon, owner of Trade Wise at https://tradewise.community/ and https://www.youtube.com/channel/UC7VmOx8DbvX4Rbrac2pPcjw
I review forex and crypto trading products and services to find the best of what’s out there for creating a passive income without becoming a full-time trader.

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