Automated Trading: Basic Introduction, Advantages and Edge

Automated trading is also known as Rule based or Algorithm based trading.  Algorithm based trading is essentially converting trading rules into a code and for both entry and exit criteria. Once programmed this can be used to take decision based precise entries and exits. The computer runs these rules through the trading software, which looks for trades that adhere to your rules

Automated/Rule based Trading-How it Works

How does it work:

Trading system taken in a combination of both historical and real time day and applies the data over set of rules to generate a buy/short or exit signal. Refer to the diagram below to for more details.

Advantages over Manual Trading:

·         Emotion Less Trading: One of the main reasons why a trader losses out is because he is not able to keep his emotion under check. One of the primary reasons to use automated trading is that it takes the emotion out of the trading. So that the traders can only focus on money management and following the rules. So this keeps a traders who either fears trading or someone who tends to over trade or hold onto a losing position under a disciplined trading environment. Hence it gives a vital edge over manual traders.

·         Check the profitability of Trading Rule: Once the system has been designed it can back test to know whether a rule is profitable. Based on test one can optimize the system to improve it and after that it’s a matter of following it.

·         Diversify Trading: With an established trading system one can trade as many underlying as they want. This will help them quickly analysis more underlying and diversify their trading portfolio and reduce risk.

·         Complex Analysis: With system based trading one can analyze based on many criteria in fraction of seconds which is almost impossible for a human trader. (For example our Powertrade smart signals check every data over 27 different parameters to decide the next action.)

What it can’t do:

·         Manual Experience: Expert Manual traders with their long experience and news based analysis can definitely outperform automated systems. But at the same time it becomes difficult to sustain a disciplined trading approach over a long run.

·         News based information: System trading only relies on technical analysis mostly and doesn’t factor in any news based information until supported by price. While manual traders may at times have access to news beforehand and hence can place trades in advance.

There are many more advantages and features to talk about. It also depends to what level of maturity the system is in. But for now we will stop here. Do write to us for your feedback and queries.