Learn More

What is Automated Trading? How it Works ? Pros and Cons - Loanbuilder

In this article, we will discuss "What is automated trading?", "How it Works", and "The Advantages and Disadvantages of Automated Trading". Please read the article very carefully and share your views about it.

What is automated trading?

Automated trading allows you to participate in financial markets using a program that follows predefined rules for entering and exiting trades. You will combine technical analysis and setting parameters for your trades, such as opening, trailing, or guaranteed stops.

Auto trading allows you to execute many trades in a short time and takes the emotion out of trading decisions. Because all rules for the trade are built into the parameters that you have set, You can use some algorithms to even follow trends and trade according to them.

How does automated trading work?

You will first choose a platform to use for your trading strategy. Your trading experience will be used to create set rules and conditions. Then your custom algorithm will use these criteria to place trades for you. These factors usually depend on the time of the trade, the price at which it should open and close, and the quantity. If the 50-day moving mean of Apple's shares rises above 200 days, then you can buy 100 Apple shares.

Automated trading strategies will monitor the financial market prices and execute trades automatically if certain parameters are met. It is intended to execute trades more quickly and efficiently and take advantage of technical market events.

Automated Trading: The Advantages

A computer can monitor the markets for trading opportunities, and execute trades. There are many benefits of automated trading.

Minimizing Emotions

Automated trading platforms minimize emotions during the trading process. Traders are more likely to stick to their plan if they keep emotions under control. Trade orders are automatically executed once all trade rules have been met. This means traders won't be able to question or hesitate about the trade. Automated trading is a great tool for traders who fear "pulling the trigger" and can help curb traders who are inclined to overtrade -- buying or selling at every opportunity.


Backtesting compares historical market data with trading rules in order to assess the viability and feasibility of an idea. All rules must be clear and unambiguous when designing an automated trading system. The computer can't make predictions and must be told what to do. These rules can be used by traders to test their trading strategies against historical data before they risk money with live trading. Backtesting is a great way for traders to refine and improve trading ideas and determine the system's expected win rate (or loss) per unit risk.

Protecting Discipline

Trade rules are set and the execution of trades is done automatically. This allows for discipline even in volatile markets. Emotional factors, such as fear of losing money or the desire for more profits, can often cause discipline to be lost. Because the trading strategy will be followed precisely, automated trading can help maintain discipline. Automated Trading also reduces the possibility of "pilot error". An order to purchase 100 shares won't be mistakenly entered if it is an order to sell 1000 shares.

Plan the trade and then trade it. This is one of the greatest challenges in trading. Trading plans can be profitable even if they are not. However, traders who disregard the rules could alter the expectancy of the system. A trading plan that is profitable 100% of the time will not be successful. Losses are part of the game. However, losing can be emotionally traumatizing. A trader might decide to abandon the next trade after losing two or three trades. The system's expectancy has been destroyed if the next trade was a winner. Automated trading platforms allow traders to trade the plan consistently.

Improved Order Entry Speed

Automated systems can generate orders immediately after trade criteria have been met since computers are quick to react to changes in market conditions. A few seconds can make a huge difference in the outcome of trades. All other orders, including protective losses, and profit targets, are generated automatically once a position has been entered. Markets move fast and it can be demoralizing for a trade to reach the profit target or blow past the stop-loss level before orders can be entered. This is prevented by an automated trading system.

Diversifying trading

Automated trading allows users to trade multiple accounts and different strategies simultaneously. This allows you to spread your risk across multiple instruments and create a hedge for losing positions. A computer can do what would take a human a long time to do in milliseconds. The computer can scan for trading opportunities on a variety of markets and generate orders. It can also monitor trades.

Automated Systems' Drawbacks

While automated trading systems have many benefits, there are also some drawbacks that traders need to be aware of.

Mechanical Failures

Automated trading seems simple. You set up the software and then let it trade. Automated trading is complex, but not impossible. A trade order can reside on a computer depending on the platform. This means that an order may not be sent to market if the internet connection is lost. It is possible that there could be discrepancies between the "theoretical" trades generated by the strategy, and the order entry platform component which turns them into actual trades. When using automated trading systems, most traders should expect a learning curve. It is best to start small while you refine the process.


It would be nice to just turn on the computer and go, but automated trading systems require constant monitoring. It is possible for technical problems, such as connectivity issues or power loss, to cause system malfunctions and other quirks. An automated trading system can experience anomalies that could lead to errant orders, missing orders, or duplicate orders. These events can be quickly identified and corrected if the system is regularly monitored.


Backtesting can be used by traders to create trading systems that look good on paper but perform poorly in live markets. Overoptimization is excessive curve-fitting, which makes a trading plan in live trading unreliable. For example, it is possible to modify a strategy to get exceptional results based on historical data. Sometimes traders mistakenly believe that a trading plan must be profitable and should not experience any drawdown in order to be viable. You can adjust parameters to make a plan that is "near perfect", but fails when it is used on a live market.

Post a Comment