Automated Trading Systems: The Pros and Cons

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Automated Trading Systems: The Pros and Cons

What Is an Automated Trading System?

Automated trading systems, also known as mechanical trading systems, algorithmic trading, automated trading, or system trading, enable traders to create particular rules for trade entry and exit that, once programmed, may be performed automatically by a computer. Indeed, according to several platforms, automated trading algorithms account for 70% to 80% or more of shares traded on US stock exchanges.

Traders and investors may automate trading systems that enable computers to execute and monitor deals based on exact entry, exit, and money management criteria. One of the most appealing aspects of strategy automation is that it may remove some of the emotion from trading by automatically placing transactions when specific conditions are satisfied.

The trade entry and exit criteria might be simple, such as a moving average crossing, or they can be complex, requiring a thorough grasp of the programming language particular to the user’s trading platform. They may also rely on the knowledge of a trained coder.

Automated trading systems often need the use of software tied to a direct access broker, and any particular rules must be developed in the proprietary language of that platform. The EasyLanguage programming language, for example, is used by the TradeStation platform. NinjaScript, on the other hand, is used by the NinjaTrader platform. The illustration below depicts an automated approach that triggered three transactions during a trading session.

A 5-minute chart of the ES contract using an automated method.

Establishing Trading “Rules”

Some trading platforms have strategy-building “wizards,” which let users to choose from a list of widely accessible technical indicators to create a set of rules that can then be traded automatically. For example, the user might specify that a long position trade would be initiated when the 50-day moving average crosses over the 200-day moving average on a five-minute chart of a certain trading instrument. Users may additionally specify the kind of order (for example, market or limit) and when the transaction will be initiated (for example, at the end of the bar or the start of the following bar), or utilize the platform’s default inputs.

Many traders, on the other hand, prefer to create their own bespoke indicators and techniques. They will often collaborate closely with the programmer to design the system. While this usually involves more work than utilizing the platform’s wizard, it provides a considerably higher degree of freedom and may provide more satisfying outcomes. Unfortunately, there is no such thing as a flawless investing plan that can ensure success in the trading industry.

Once the rules are set, the computer may watch the markets for buy and sell opportunities based on the trading strategy’s criteria. Depending on the regulations, any orders for protective stop losses, trailing stops, and profit goals will be produced automatically as soon as a trade is placed. This rapid order entry might represent the difference between a minor loss and a catastrophic loss in fast-moving markets if the deal turns against the trader.

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Advantages of Automated Systems

There are several benefits to having a computer watch markets for trading opportunities and execute deals, including:


Throughout the trading process, automated trading systems reduce emotions. Traders often have an easier time adhering to the strategy when they keep their emotions in control. Traders will not be able to pause or challenge the deal since trade orders are executed automatically once the trade conditions are satisfied. Aside from assisting traders who are hesitant to “hit the trigger,” automated trading might discourage individuals who are prone to overtrading – buying and selling at every apparent opportunity.


Backtesting evaluates the validity of a concept by applying trading rules to past market data. When building an automated trading system, all rules must be strict, with no opportunity for interpretation. The computer cannot make educated assumptions and must be informed precisely what to do. Traders may test these specific sets of rules on historical data before putting money at risk in actual trading. Backtesting carefully helps traders to analyze and fine-tune a trading concept, as well as calculate the system’s expectancy – that is, the average amount a trader may anticipate to gain (or lose) per unit of risk.

Preserving Discipline

Discipline is maintained even in tumultuous markets since trading rules are defined and transaction execution is automated. Discipline is often lost as a result of emotional causes such as fear of losing money or the desire to squeeze out a bit more profit from a deal. Because the trading strategy will be executed perfectly, automated trading helps to retain discipline. Furthermore, “pilot error” is reduced. For example, an order to purchase 100 shares will not be mistyped as an order to sell 1,000 shares.

One of the most difficult aspects of trading is planning the deal and trading the strategy. Even if a trading strategy has the potential to be lucrative, traders who break the rules change the system’s expectation. There is no such thing as a trading strategy that consistently wins. Losses are, after all, a part of the game. Losses, on the other hand, may be psychologically traumatic, thus a trader who has two or three losing transactions in a row may opt to miss the following deal. If the following deal had been a victory, the trader would have already destroyed whatever hope the system had. Trading the strategy using automated trading systems allows traders to attain consistency.

Improving Order Entry Speed

Because computers react instantly to changes in market circumstances, automated systems may produce orders as soon as trading requirements are satisfied. Getting into or out of a transaction a few seconds early may make a significant impact in the result of the deal. All additional orders, including protective stop losses and profit targets, are automatically produced as soon as a position is registered. Markets may move rapidly, and it can be discouraging to see a trade hit a profit objective or blast beyond a stop-loss level before the orders can even be executed. This is avoided by using an automated trading system.

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Diversifying Trading

Automated trading systems allow the user to trade numerous accounts or strategies at the same time. This has the ability to distribute risk across many instruments while also establishing a hedge against losing positions. What would be very difficult for a person to do is accomplished in milliseconds by a computer. The computer can search for trading opportunities across many marketplaces, create orders, and track deals.

Drawbacks of Automated Systems

Although automated trading systems provide numerous benefits, there are certain drawbacks and realities that traders should be aware of.

Mechanical Failures

The principle behind automated trading seems straightforward: install the software, write the rules, and watch it trade. In actuality, automated trading is a complex trading approach that is not without flaws. A trade order might be stored on a computer rather than a server, depending on the trading platform. That is, if an internet connection fails, an order may not be communicated to the market. There might also be a mismatch between the strategy’s “theoretical trades” and the order entry platform component that converts them into actual trades. When employing automated trading systems, most traders should anticipate a learning curve, and it is often a good idea to start with lower transaction amounts as the process is perfected.


Although it would be ideal to switch on the computer and walk away for the day, automated trading systems do want supervision. This is due to the possibility of technical failures, such as connection troubles, power outages, or computer breakdowns, as well as system idiosyncrasies. An automated trading system may encounter anomalies that result in erroneous orders, missing orders, or duplicate orders. These incidents may be discovered and rectified immediately if the system is monitored.


Though not limited to automated trading systems, traders who use backtesting methods might design systems that appear excellent on paper but perform poorly in practice. Over-optimization is defined as excessive curve-fitting that results in a trading strategy that is unreliable in actual trading. For example, it is feasible to fine-tune a strategy to obtain remarkable outcomes on the historical data on which it was tested. Traders sometimes mistakenly believe that an effective trading strategy must have almost 100% winning trades or never suffer a downturn. As a result, specifications may be tweaked to produce a “near perfect” strategy that entirely fails when applied to a real market.

Avoid the Scams

While looking for your ideal system, keep in mind that if it seems too good to be true, it usually is. There are several frauds going around. Some methods offer great earnings at a little cost. So, how can you know whether a system is genuine or not? Here are some general guidelines:

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  1. Examine whatever you’d have to pay for before paying or putting money down for a trading account, and always ask questions. If you don’t, you can wind up losing money.
  2. Make sure you’ve done your homework and know all there is to know about the system in issue. Also, before you commit, check the terms and conditions.
  3. Are there any testimonies available? Look for reviews on third-party websites or even financial regulatory websites.
  4. Is there a trial period for the system? Many scam sites will not provide you with a trial period.

Server-Based Automation

Traders may use a server-based trading platform to operate their automated trading systems. These platforms commonly provide commercial methods to traders, allowing them to develop their own systems or host current systems on the server-based platform. The automated trading system may search for, execute, and monitor transactions for a charge, with all orders stored on the server. This often leads to possibly quicker and more reliable order entry.

Before you Automate

The term “automation” may seem to make the process easier, but there are a few factors to bear in mind before you begin utilizing these systems.

Consider if you should utilize an automated trading system. There are certainly promises of profit, but it may take longer than you expect. Will it be better for you to trade manually? After all, these trading techniques may be complicated, and if you lack expertise, you may lose.

Know what you’re getting yourself into and make sure you comprehend the system. That involves simplifying your aims and techniques before moving on to more complex trading strategies.

Remember that there is no one-size-fits-all solution. You must choose your chosen approach, where you want to use it, and how much you want to modify to your own scenario. All of this, of course, is related to your ultimate ambitions.

The Bottom Line

Although enticing for a number of reasons, automated trading systems should not be seen as a replacement for meticulous execution. Technology breakdowns might occur, and as a result, these systems must be monitored. Server-based platforms may be a viable option for traders looking to reduce the risks of mechanical failure. Remember that before you utilize automated trading systems, you need have some trading expertise and understanding.

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