Automated trading systems – which are sometimes called “mechanical” trading systems – allow Forex traders of all levels of skill and experience to establish rules and strategies which can be executed automatically by a computer.
Here’s why you should consider establishing yourself as an automated trading specialist.
What is Automated Trading?
Automated trading is usually associated with algorithmic trading, where a software executes, buys and sells orders by itself. The software submits orders relying on pre-defined rules based on technical analysis and indicators or price action.
The obvious question is then “what’s the difference between automated trading and systematic trading?”
Simply put, automated trading is the result of systematic trading. Systematic trading can be automated using software by setting rules, goals, and risk control with no need for human intervention to execute orders. The trader just introduces these rules into the software, and this executes the trades.
Advantages of an Automated Trading System
Figure 1: Automated trading is considered by many experts to be the way of the future
One of the biggest problems for traders is their ability (or lack thereof) to follow one of the oldest maxims in the book; “plan the trade, and then trade the plan”.
Failing to follow this strategy can mean that even If a plan is successful, a trader can undermine their own success by not following their own rules.
Even the most foolproof trading strategies are never 100% successful and a trader’s emotions always tend to kick in at exactly the wrong times. It’s a result of human nature that traders are inherently greedy or fearful, compromising their trading results.
Having predefined rules and following them to the letter allows you to obtain consistent results. Whether those results are good or bad is actually kind of irrelevant, because at least consistency allows a trader to evaluate how their strategy is operating.
Automated trading helps with all of these issues because it removes one of the uncontrollable variables; emotion.
2. Strategy Evaluation
To know if your trading strategy is successful, back-testing is one of the approaches you’ll need to use.
Back-testing is a method which helps traders evaluate how their automated system would have performed when used over a certain set of historical data.
While it sounds like a complicated process, back-testing is actually very easy to apply once a strategy has been coded into a program, and can be done almost immediately in most modern trading platforms. Back-testing shows traders the overall view of their system and what bugs or inefficiencies need to be fixed before going live.
One of the easiest platforms for trading automation and backtests is Metatrader.
3. Time Efficiency
Due to the normal requirements of everyday life – for example important stuff like your job, family, social life etc. – trading can be a difficult task, particularly when it falls low on your list of priorities. That can mean that keeping updated on market movements and continuing to operate as normal in your everyday life can sometimes feel like impossible work when you’re stressed and busy.
The beauty of automated trading is that once you’re confident that your strategy is successful (after back-testing it), the automated system you set up can execute trades and adapt itself accordingly to market movements without you needing to lift a finger.
This will then allow you to free up the time you need to enjoy your life, leaving your automated system to do the work for you.
4. Exploring New Markets
When first-time traders begin operating on a demo account, they usually feel one of two ways; either they’re enormously excited about trying something new, or they’re overwhelmed by the fact that they’re diving into the unknown.
To properly trade using an automated system, as with any other system a trader should make sure they know as much as possible about their system before moving to a real account with real capital behind it. Before going live it is essential to know how a strategy works, and which variation of that strategy is the best.
A major advantage of an automated strategy is that it can operate multiple demo accounts with different strategies. So, by doing this you will be able to test different instruments and markets and see which ones are suitable for certain strategies and which ones will need reworking.
5. Execution Speed
Let’s be honest, no one can beat a computer in a challenge of computation speed.
When dealing with calculations, comparing numbers and conditions and dealing with electronic data, a computer will always be the winner, no matter the calibre of the opponent.
A computer can receive data, analyze it, check if some entry or exit conditions are met, calculate risk and transmit orders in a much faster way than a trader would ever be able do.
Setting up an automated trading system allows you to automate all of these processes so you don’t have to spend endless hours calculating stats and staring at graphs.
Figure 2: Automated trading allows you to take a back seat and let the algorithm do the work
With the use of algorithms now becoming ubiquitous across the world, the trading industry in particular has been changed significantly.
Nowadays, many investment banks – especially those on Wall Street – hire software developers to replace their old-school traders. Systematic trading develops into automated trading, allowing traders to become more logical, consistent, faster and profitable.
Every trader should at least consider testing his or her own algorithm to beat the market.