Automated trading systems: Pros and cons

What is an automated trading system?

Automated or algorithmic, mechanical, or system trading allows traders to program specific rules to execute trade entries and exits. Once programmed, the computer can then automatically run them. Automatic trading systems are responsible for 70% to 80% of the shares traded at U.S. exchanges.

Traders and Investors can automate trading systems by converting entry and exit rules and money-management rules into computerized systems that execute and monitor trades. The most significant advantage of automated trading systems is that they can remove some of the emotional components of trading by automatically placing trades when specific criteria are met.

Trade entry and exit rules may be based on simple conditions, such as crossing a moving average, or more complex strategies that require an in-depth understanding of the programming languages specific to a user’s trading platform. A programmer can develop these rules.

Automated trading systems require software that is linked to a broker. Any rules written must also be in the proprietary language of that platform. EasyLanguage is used by the TradeStation trading platform. The NinjaTrader uses NinjaScript. The figure below illustrates an automated trading strategy that executed three trades in a single session.

Establishing Trading “Rules”

The “wizards,” available on some trading platforms, allow users to select from various technical indicators and create a set of rules that will be traded automatically. A user can, for instance, specify that a trade will be initiated when the 50-day Moving Average crosses over the 200-day Moving Average on a 5-minute chart of a specific trading instrument. The user can also specify the type of order, such as market or Limit. They can also use the default inputs on the platform.

Many traders choose, however, to program their custom indicators and strategies. Often, they will work closely with a programmer to create the system. This method is more time-consuming than using the platform wizard. However, the results are often more rewarding. Unfortunately, just like in trading, there must be a perfect strategy to guarantee success.

After establishing the rules, the computer will monitor the market to identify buy and sell opportunities that meet the trading strategies’ specifications. According to the regulations, orders for stop lossTrailing Stop, and profit targets are automatically generated when the trade is entered. This instantaneous entry of orders can differentiate between a minor and catastrophic failure if the business goes against the trader.

Automated Systems: Benefits

The benefits of having a computer monitor and execute trades on the market include the following:

Reduce Emotions

Automated trading software minimizes emotions during the entire trading process. By controlling their feelings, traders are likelier to stick with the plan. Trade orders are automatically executed once trade rules have been met. Traders will not be able to question or hesitate about the trade. Automated trading is a great way to help traders who hesitate to pull the trigger. It can also curb overtraders who buy and sell at every opportunity.


Backtesting is the application of trading rules on historical market data to test the viability of an idea. All rules must be unambiguous when designing an automated trading system. Computers cannot guess and must be instructed precisely on what to perform. Traders can test these rules on historical data before they risk money. Backtesting allows traders to fine-tune and evaluate a trading concept and determine the expected return on investment (ROI) for the system.

Maintaining Discipline

Because trade rules are set, and trade executions are performed automatically, discipline can be maintained even in a volatile market. Emotional factors, such as the fear of losing money or the desire to squeeze out an extra profit, can lead to discipline being lost. The trading plan is followed in the letter. The “pilot error” can also be minimized. If, for example, an order of 100 shares is correctly entered as an order of 1,000 shares.

Planning the trade and trading the plan is one of the most significant challenges in trading. Trading plans can be profitable even if they are not followed. Traders who do so will alter the expectations that the system had. Trading plans that are 100% successful do not exist. Losses are part of the game. Losses can be emotionally traumatizing. A trader may decide to avoid the next trade if he has had two or three losses in a short period. The trader’s expectation of the system would have been destroyed if this next trade had succeeded. Trading systems that automate the trading process allow traders to be consistent by following a plan.

Improve Order Entry Speed

Automated systems can generate orders immediately when trade criteria are met, as computers react instantly to changes in market conditions. A few seconds can make all the difference to the outcome of a trading transaction. All orders, including profit target and stop loss, are generated automatically after taking the position. Seeing a trade hit the target profit or go past the stop-loss before orders are entered is frustrating. An automated trading system prevents this.

Diversifying Trade

This allows the trader to spread risk over multiple instruments and strategies. It can extend the risk across multiple instruments and create a hedge for losing positions. A computer can do in milliseconds what would take humans ages to complete. The computer can scan markets for trading opportunities, create orders and monitor trades.

  • ProsMinimize emotional trading
  • Allows for backtesting
  • Maintains the discipline of the trader
  • Multiple accounts are allowed
  • You can also find out more about ConsMechanical failures are possible.
  • Monitoring of functionality
  • Can perform poorly


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