AUTOMATION IN TRADING

Automated trading systems—also referred to as mechanical trading systems, automated trading, or system trading—allow traders to establish specific rules for both trade entries and exits that, once programmed, can be automatically executed via a computer. In fact, 70% to 80% of shares traded on U.S. stock exchanges come from automatic trading systems as of 2024.

Traders and investors can turn precise entrance, exit, money management,rules into automated trading systems that allow computers to execute and monitor the trades. One of the biggest attractions of strategy automation is that it can take some of the emotion out of trading since trades are automatically placed once certain criteria are met.

Automated trading systems typically require the use of software linked to broker and any specific rules must be written in that platform's proprietary language. The platform, for example, uses the EasyLanguage programming language.

Many traders, however, choose to program their own custom indicators and strategies. They will often work closely with the programmer to develop the system. While this typically requires more effort than using the platform's wizard, it allows a much greater degree of flexibility, and the results can be more rewarding. Just like anything else in the trading world, there is, unfortunately, no perfect that will guarantee success.Back Testing applies trading rules to historical market data to determine the viability of the idea. When designing a system for automated trading, all rules need to be absolute, with no room for interpretation. The computer cannot make guesses and it has to be told exactly what to do. Traders can take these precise sets of rules and test them on historical data before risking money in live trading. Careful backtesting allows traders to evaluate and fine-tune a trading idea, and to determine the system's expectancy—i.e., the average amount a trader can expect to win (or lose) per unit of risk.

One of the biggest challenges in trading is to plan the trade and trade the plan. Even if a trading plan has the potential to be profitable, traders who ignore the rules are altering any expectancy the system would have had. There is no such thing as a trading plan that wins 100% of the time. After all, losses are a part of the game. But losses can be psychologically traumatizing, so a trader who has two or three losing trades in a row might decide to skip the next trade. If this next trade would have been a winner, the trader has already destroyed any expectancy the system had. Automated trading systems allow traders to achieve consistency by trading the plan.

Although it would be great to turn on the computer and leave for the day, automated trading systems do require monitoring. This is because of the potential for technology failures, such as connectivity issues, power losses, or computer crashes due to system quirks. It is possible for an automated trading system to experience that could result in errant orders, missing orders, or duplicate orders. If the system is monitored, these events can be identified and resolved quickly