How does Automated Trading System Work?

Automated trading, which is also known as algorithmic trading, has become popular in the trading communities. As technology emerged, the automated trading system is becoming feasible for any kind of trader regardless of the experience. However, no one ever imagined that the trading would be this easy by automated trading software.

 

As per the research, nowadays, two-thirds of best forex brokers provide automated trading software to their clients. The majority of the trading automation offers high-frequency trading service, while some may not ensure that. In this article, we are not going to provide you with high-speed trading brokers, but we will tell you the ways to find them and how automation works.

When you hear the term ‘automated,’ you may feel jolly that it is easy. However, it is not a piece of cake, but definitely more comfortable than manual trading.

How does Automated Trading System Work

Working Procedure

Imagine your current job if you have one. You certainly work through a strategy with the blend of technology that gets your work done. Trading automation also works like that. Let’s see the procedure.

Proper Strategy

Building a strategy that works for you automatically is the first priority. However, you may find the default strategy, but it is always better to create your own strategy to get maximum benefits. A single strategy might not always work. So, creating multiple strategies should be perfect.

On the other hand, developing the winning strategy is for automated forex trading, and other is the most difficult task.

Researching through the forex trading platforms will help you to build a strategy that can ensure a reliable return.

Technology Stack

After developing the strategy knowing the technology is an important part of building the automated trading system. For that, understanding the programming language, tools, and libraries will ultimately get you the maximum outcomes. However, if you are not aware of the programming, you may hire someone to do the work for you. As per your strategy, the programmer will set up a system that can gather data and execute the strategy on time.

Sourcing the data is the hardest part of this step, so hiring an experienced one will leverage you in the future.

Also, the platform will work your way, and you can add addons from the platform store to customize the system.

Set the Parameter

Once you are done with setting up the automated trading software, you have to set the trading parameters according to your wish.

Finally, it will work as per your settings, even when you are not in Infront of the computer.

Algorithm Types

Usually, four types of algorithms or programs are used by traders. They are,

  • Execution

Suppose, you have a huge investment in a certain share and want to sell at a peak price or on the maximum profits. In that case, manual trading may not get you the maximum price as a milliseconds matter.

On the other hand, automated trading will execute the order whenever found your defined command. However, it will not guarantee you the profit but will definitely ensure you the better price.

  • Arbitrage

It allows the system to earn a spread from two currencies. But you may want to know, how does automated forex trading work?

Well, it is not rocket science. The system will search for the price difference of certain pairs or currencies in future and cash markets. Additionally, the automated system can take advantage of.

  • Following the Trend

A huge number of investors rely on trend following, such as moving average, stochastics, momentum, etc. These work as indicators, which are picked by the automated trading software and execute buy and sell.

  • Scalping

When you set up the scalping on your system, the algorithm works on very little price gaps and always attempts to make a profit from small moves.

Pros of Automated Trading

 Pros of Automated Trading

Technology always supports us with advantages, and an automated trading system is like that too. Follow our lead for the advantages of automation.

Backtesting

It refers to evaluating a developed trading strategy based on some detailed historical data. Moreover, this tool also analyzes a position and how it will work when it comes to live trading. All these testing will happen before executing a trade with real money.

There is a common belief that backtesting only worked for forex trading platforms! However, the good news is, it works for almost all the available instruments, such as shares, cryptocurrencies, and commodities.

Let’s explain it in a practical way. Suppose you want to predict the oil price relaying on a significant upcoming event. The event could be a recession or war, or anything else. So, the automated tools will find the historical data on that and give a prediction and trading strategy.

That is how the risk will be minimized.

Objectivity

Suppose you want to invest a big amount of money while concentrating on different instruments. So, in this kind of situation, manual trading will surely break the focus. As a result, you may face failure in your trading.

It becomes more intense when you trade forex as it is most volatile. So, keeping a continuous eye is the main factor in monitoring a volatile market. That said, you may get emotional while manually trading.

Automatic trading will get you rid of this and make you relax. Besides, you can concentrate on different instruments and maximize profit.

Speed and Convenience

A speedy transaction is key to get you a maximum profit. Different mechanical systems with different levels will always look for favorable conditions and trade quickly as soon as they meet all the conditions given by you.

Trading automation is exponentially faster compared to the manual one. On the other hand, the trading market moves faster. So, the automatic reaction to sudden market changes will thrive you a big trading advantage.

Remove Human Error

When a trader interacts with the market, may get confused and face challenges. Even though the trader has the perfect working strategy, manual trading can get a significant error. And it has been seen that some traders can make an error without knowing it.

Trading automaton has the ability to omit the human errors and execute the trade precisely without mixing up the emotional factors.

Cons of Automated Trading

Tech Dependency

Getting something automated is undoubtedly intelligent; however, it is not foolproof. Failures in the system are inevitable, and they may cause you a serious failure sometimes—for example, the stock market crash in 2010, which was caused by a programming error.

So, automated trading software is not special, and getting a bug or system failure is usual. Besides, a slow internet connection can be disastrous.

For automation, it needs a fast-paced environment along with a reliable infrastructure to get a smooth experience.

We can sum up that you may automate the system but have to keep an eye on the security and reduce the risk.

Overfitting

The automated forex trading and others run on historical data mostly. So, the immense amount of data is analyzed to feed you with the correct information. However, sometimes the system may take some unnecessary data, which is called overfitting. It is not bad but may lead to any inflexibility for future conditions based on a specific trading strategy.

That is where backtesting comes in.

Impact of Automation on Trading Markets

Impact of Automation on Trading Markets

Various forex broker reviews educate us about the top impact of automation. We are explaining in a brief what we have found.

The speedy trading would certainly provide access to the volatile market, while at the same time, it may cause the market to fall.

On the other hand, computers carry out trading, so the increase in liquidity is natural.

Server-based Automation

Previously automated trading software worked by installing on pc only. Nowadays, it works from anywhere from any device based on a server. Besides, server-based automation offers a preplanned strategy with customization. So, you can make your own strategy after following some tutorials.

It can also provide a monitoring service or system scan on your trading placement for a crosscheck. However, automation on the server requires the fastest internet; the faster the internet, the faster the transaction.

Conclusion

As an active investor, it is highly important to understand that automated trading is an alternative way to boost the market, but you have to understand it fully before deploying. If you can use the automated trading system properly, there are huge possibilities that you end up bagging a significant profit. On the other hand, inappropriate use may wipe your portfolio.

Speed trading can make the trader efficient in almost all aspects of the trading experience. However, it has some significant advantages, which we have mentioned earlier, along with the shortcomings. We look at the top forex brokers list on automation; advantages would definitely outweigh the disadvantages.

Since you can do the automation of different instruments from a single platform, a full-proof strategy get you success eventually.