It sounds pretty unreal, doesn’t it? Automated trading. The words bring to mind a lonely computer sitting at a desk where a trader for many hours a day once diligently sat. This clever little PC has its rules to follow, it monitors the market conditions, and it always makes perfectly executed trades and unsurpassing profits when it has a profitable and well-thought trading plan to follow. Day in, day out…
Well back in the real world, we know nothing is that easy! There are definitely some great systems around that can help with making your investment strategy more autonomous, but there is still a huge amount to know and a lot of groundwork to set before this can be a reality.
Let’s take a look at how you can make this type of strategy work for you and why you might, or maybe might not, want to.
What is automated trading?
Mechanical trading systems, algorithmic trading, and automated trading all refer to the same kind of trading in which the investor uses predetermined rules to automatically enter and exit trades based on a set of market conditions that fit with their individual strategy and risk profile.
Rules for entering and exiting a trade may be somewhat basic, such as a moving average crossing over, or rather complex, requiring an in-depth knowledge of the programming language used by the user’s trading platform and an advanced level of trading knowledge. In other cases, they may rely on the knowledge of a specialist programmer.
However the program is set up, the trader will need to conduct a thorough technical or fundamental analysis prior to pulling the trigger on a pre-set fundamental strategy.
But automated trading can also simply be used to scan and somehow filter the market to find trading opportunities that best fit your trading plan and risk tolerance.
Pros of using automated trading
- You can adjust your approach to fit your trading style and risk appetite and have transactions executed automatically day or night without any pause.
- With automated trading, you usually lessen the effect of your emotions in trading, as everything can be done by a trading robot.
- You might find new opportunities and evaluate trends using a variety of metrics you might not be able to analyze by yourself.
- It allows for several real-time trades to be opened and closed at once and do away with manual execution.
- Traders can benefit from higher speed and reliable trading execution.
- It can sometimes help traders to capitalize on special events or unusual large price fluctuations.
Cons of using automated trading
- Mechanical breakdowns of algorithms are possible.
- Issues could arise from loss of server connection.
- The programs should require monitoring for functionality and improvements.
- If you’re looking to improve and optimise your automated strategy too much (and too often), there is a risk of over-optimization.
- It may not function well in a real world market situation or very volatile situations.
A couple of examples of automated trading strategies
Mean Reversion
One example of how an automated system can work is in regard to Mean Reversion.
Mean reversion is a calculation employed by investors in the stock market that takes into account the stock’s transitory high and low values and finds an average. Finding the average price of a stock across its trading range requires the use of analytical methods.
When a stock’s current price is lower than its historical average, investors may be tempted to buy in the hopes that the price will rise. On the flipside, investors see a stock as undesirable when its present market price is above its typical price because they anticipate the price will decline, bringing it back down to its average value.
A common technical indicator used to determine whether to purchase or sell a company is the standard deviation of its most recent price movement and algorithms are often used to spot and take advantage of this methodology. But there are other technical indicators or trading tools you can combine to profit from this methodology.
Portfolio Rebalancing
Another example of automated algorithms is for use in Index Rebalancing.
Generally, it’s best practice to make sure that the underlying assets of a fund are rebalanced to reflect the state of the current market to manage risk and maintain diversification.
Let’s assume we’re dealing with a pension fund, maybe the starting allocation is 50% stocks and 50% bonds.
In this scenario, stocks become more valuable over time, and eventually account for more than half of the portfolio. A trader may earn a profit during the process of rebalancing by selling a portion of their stock holdings and returning their portfolio’s stock-to-bond ratio to its initial 50/50 split.
An algorithm can automate this rebalancing process for you according to your preferences.
Is automated trading the right strategy for you?
Just because you’re setting up an automatic system, it doesn’t mean it won’t require some work, and it also doesn’t mean you’re eliminating risk. If you’re looking for a method that can assist you with your trading based on a set of rules that you establish in advance, automated trading may be what you need.
If you’re looking for a lower-maintenance trading approach that makes heavy use of modern technology because that interests you and you enjoy doing so, then it may be for you, but you will first need to set up a trading plan.
It can be particularly useful for traders who want to keep their emotions out of their investments too. If you believe you tend to over-trade or become panicky in certain situations, then it also might be worth looking into in some capacity.
Bear in mind that you’ll either need to be very knowledgeable on the systems that you choose, or you’ll want to have help to monitor the software to make sure it’s operating properly at all times.
There’s no escaping doing the appropriate research, whether you’re setting your own parameters or selecting a platform that does it all for you, you still need to know what you’re doing.
You have the ability to utilise the MetaTrader trading platform with ActivTrades. This platform is well-known for the possibilities it provides to create, rent or buy and execute automated trading strategies. The broker has even built their own one-of-a-kind trading tools to assist you in improving your trading process and elevating your trading to a higher level, especially when it comes to active strategies like scalping and day trading.
Your capital is in the hands of technology, but it’s your responsibility to set it up for success. As with every trading strategy around, be sure the outcome fits with your appetite for risk, compliments your goals, and never invest more of your hard-earned capital than you’re prepared to lose.
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