There are more Pros Compare to Cons Of Automated Trading Systems

There are more Pros Compare to Cons Of Automated Trading Systems

Traders and investors can turn precise entry, exit and 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 (ATS), also referred to as mechanical trading systems, algorithmic trading, 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. The trade entry and exit rules can be based on simple conditions such as a moving average crossover, or can be complicated strategies that require a comprehensive understanding of the programming language specific to the user's trading platform, or the expertise of a qualified programmer. Automated trading systems typically require the use of software that is linked to a direct access broker, and any specific rules must be written in that platform's proprietary language.

Figure 1: A five-minute chart of the ES

Once the rules have been established, the computer can monitor the markets to find buy or sell opportunities based on the trading strategy specifications. Depending on the specific rules, as soon as a trade is entered, any orders for protective stop losses, trailing stops and profit targets will automatically be generated. In fast moving markets, this instantaneous order entry can mean the difference between a small loss and a catastrophic loss in the event the trade moves against the trader.

Advantages of Automated Trading Systems

A) Minimize Emotions. Automated trading systems minimize emotions throughout the trading process.Since trade orders are executed automatically once the trade rules have been met, traders will not be able to hesitate or question the trade. In addition to helping traders who are afraid to "pull the trigger", automated trading can curb those who are apt to overtrade – buying and selling at every perceived opportunity.

b)  Ability to Backtest. Backtesting applies trading rules to historical market data to determine the viability of the idea. Traders can take these precise sets of rules and test them on historical data before risking money in live trading.

c)  Preserve Discipline. Because the trade rules are established and trade execution is performed automatically, discipline is preserved even in volatile markets. Discipline is often lost due to emotional factors.

d)  Achieve Consistency.  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. Automated trading systems allow traders to achieve consistency by trading the plan. (

e)  Improved Order Entry Speed. Since computers respond immediately to changing market conditions, automated systems are able to generate orders as soon as trade criteria are met.

f)   Diversify Trading. Automated trading systems permit the user to trade multiple accounts or various strategies at one time. This has the potential to spread risk over various instruments while creating a hedge against losing positions The computer is able to scan for trading opportunities across a range of markets, generate orders and monitor trades.

Disadvantages and Realities of Automated Trading Systems

A) Mechanical failures. Technical glitches such as  Internet connection is lost, an order might not be sent to the market. There could also be a discrepancy between the "theoretical trades" generated by the strategy and the order entry platform component that turns them into real trades.

B) Monitoring. automated trading systems do require monitoring due do the potential for mechanical failures, such as connectivity issues, power losses or computer crashes, and to system quirks.

C) Over-optimization. Though not specific to automated trading systems, traders who employ backtesting techniques can create systems that look great on paper and perform terribly in a live market. Over-optimization refers to excessive curve-fitting that produces a trading plan that is unreliable in live trading.

Conclusion

Although appealing for a variety of factors, automated trading systems should not be considered a substitute for carefully executed trading. Mechanical failures can happen, and as such, these systems do require monitoring. Server-based platforms may provide a solution for traders wishing to minimize the risks of mechanical failures.