Automated trading systems allow traders and investors to execute and monitor trades with their computer. Since trades are automatically placed once a criterion is met, it can take some of the emotion out of trading. This article talks about the Pros and Cons Of Automated Trading Systems.
Automated trading systems are mechanical algorithmic trading, trading systems, system trading, automated trading allows the traders to establish specific rules for both buy and sell orders that, once programmed, can be automatically executed via the system.
The trade entry, as well as the exit rules, are based on simple conditions like a moving average crossover or they can also be complicated strategies that would require a comprehensive understanding of the programming language specific to the trading platform of the user.
Some trading platforms have a strategy-building wizard that would allow users to make selections from a list of commonly available indicators (technical) to build a set of rules that can then be traded automatically. For example, the user could establish, a long trade that will be entered once the 50-day moving average crosses above the 200-day moving average on a 5-minute chart of a particular trading instrument.
Pros of Automated Trading Systems
Minimizing emotions. Automated trading systems help in minimizing emotions throughout the process of trading. By keeping emotions in check it helps traders to typically have an easier time sticking to the plan. Since the trade orders get executed automatically once the trade rules are met, traders do not have to hesitate or question the trade.
Improving the speed of order entry. Since computers have the ability to respond to the changing market conditions, automated systems can generate ideas as soon as certain criteria are met.
Backtesting. Backtesting applies trading rules to the historical market data in order to determine the viability of the idea. When a system is designed for automated trading, all rules need to be absolute and there has to be no room for interpretation. The computer as we know cannot make guesses & it needs to be told exactly what is to be done.
Cons of Automated Trading Systems
Mechanical failures. While it may seem simple to set up the software, program the rules & watch it trade, it is not that way, in reality. Automated trading is a really sophisticated method of trading but it is however not infallible. Depending on the platform used for trading, a trade order could stay on a computer, not on a server. This means that if the internet connection is lost, the order might get sent to the market thus giving birth to discrepancies.
Over-optimization. Traders who employ backtesting techniques can create systems that would look great on paper & may perform terribly in a live market. Over-optimization refers to excessive curve-fitting that would produce a trading plan that goes unreliable in live trading. It’s possible to tweak a strategy to achieve exceptional results on the historical data on which it was tested.
Monitoring. Although it sound great to turn on the computer, leave it for the day and enjoy profits but it might not go very well since automated trading systems require monitoring at some point. This is so because there is still potential for technology failures like power losses, connectivity issues or computer crashes.