May 07, 2023



The Power of Automated Trading Systems

This article is a comprehensive guide on Automated Trading Systems:

Part 1: General information

Part 2: Pros and Cons of Automated Systems

The Power of Automated Trading Systems

In the world of trading, technology has been a game-changer. One such innovation is the Automated Trading System (ATS), a powerful tool that allows traders to set specific rules for trade entries and exits. Once these rules are programmed, they can be executed automatically by a computer. This approach to trading is also known as algorithmic trading, system trading, or mechanical trading.

According to various reports, 70% to 80% of shares traded on U.S. stock exchanges are executed by automated trading systems. This high percentage underscores the growing popularity and effectiveness of these systems.

The Mechanics of Automated Trading

Automated trading systems enable traders to define precise entry, exit, and money management rules. Once these rules are set, the system can execute and monitor trades automatically. This automation can help reduce the emotional component of trading, which can often interfere with decision-making processes.

The rules for trade entry and exit can range from simple conditions, like a moving average crossover, to complex strategies that require a deep understanding of the programming language specific to the user's trading platform. These rules can be created based on the trader's expertise or with the help of a qualified programmer.

For instance, a trader might set a rule that if the 50-day moving average of a particular stock crosses above the 200-day moving average, the system should place a buy order. Conversely, if the 50-day moving average crosses below the 200-day moving average, the system should place a sell order. These rules can be programmed into the system and then executed automatically when the conditions are met.

The Role of Trading Platforms

In a manual trading scenario, a trader would need to constantly monitor the market conditions, calculate these averages, and then execute the trades when the conditions are met. This process can be time-consuming and prone to errors, especially in volatile market conditions.

Various trading and support platforms simplify this process by automating these tasks. They allow traders to input their rules, and the platform takes care of the monitoring, calculation, and execution. Some platforms even offer strategy-building "wizards" that allow users to select from a list of commonly available technical indicators to create a set of rules. These rules can then be automatically traded.

The Pros and Cons of Automated Systems

Automated trading systems come with a host of benefits but also carry certain drawbacks. Understanding these can help traders make an informed decision about whether to use these systems.

1. Pros of Automated Systems

Minimizing Emotions: One of the significant advantages of automated trading systems is their ability to minimize emotional involvement. Emotions can often lead to hasty decisions or hesitation, both of which can impact the success of trades. By automating the trading process, trades are executed based on pre-set rules, reducing the chance for emotional trading.

Backtesting: Automated systems allow for backtesting, which involves applying trading rules to historical market data to determine the viability of a strategy. This process can help traders refine their strategies and understand what to expect in terms of potential profits or losses.

Consistency: Automated systems can help maintain consistency in trading. Since trades are executed based on pre-set rules, the system ensures that the trading plan is followed exactly. This consistency can be particularly beneficial during volatile market conditions when sticking to a plan can be challenging.

Speed of Order Entry: Automated systems can respond instantly to changing market conditions, allowing for potentially faster order entries. This speed can be crucial in volatile markets where prices can change rapidly. As soon as a trade rule is met, the system can generate orders, including protective stop losses and profit targets.

Diversification: Automated trading systems allow users to trade multiple accounts or different strategies simultaneously. This can spread risk over various instruments and create a hedge against losing positions. The computer can efficiently scan for trading opportunities across a range of markets, generate orders, and monitor trades.

24/7 Trading: Automated systems can operate round the clock, which is particularly useful in the Forex market which operates 24 hours a day. This means the system can take advantage of trading opportunities that occur outside of the trader's trading hours or when the trader is not able to monitor the markets.

2. Cons of Automated Systems

Technical Failures: While automated systems are designed to streamline the trading process, they are not immune to technical failures. Issues such as connectivity problems, power losses, or error or bugs can interfere with trade execution. For instance, if an internet connection is lost, an order might not be sent to the market.

Monitoring Requirement: Despite the automation, these systems still require monitoring. Anomalies can occur, leading to errant orders, missing orders, or duplicate orders. Regular monitoring can help identify and resolve these issues promptly.

Risk of Over-Optimization: Over-optimization refers to the excessive curve-fitting that can make a trading plan unreliable in live trading. It's possible to tweak a strategy to achieve exceptional results on historical data, but this doesn't guarantee success in live trading. Traders need to be wary of this risk when using automated systems.

Before You Automate

Before embarking on your journey with automated trading systems, it's essential to do your homework. While these systems promise a path to profitability, achieving success is a process that requires time, patience, and understanding. But don't let this deter you. With the right tools and platforms, like ZapAnt, you can navigate this process more smoothly, making it easier for you to understand the ins and outs of automated trading systems and to help you make informed decisions.

The Bottom Line

Automated trading systems, while not a magic wand, are a powerful tool that can significantly enhance a trader's strategy. They offer a level of efficiency, speed, and consistency that can be challenging to achieve with manual trading, especially for those new to the trading world.

For inexperienced traders, the world of trading can seem daunting. The need to constantly monitor market conditions, make quick decisions, and manage emotions can be overwhelming. This is where automated trading systems come into play. They can handle these tasks, allowing traders to focus on refining their strategies and understanding the market better.

Zapant's vision aligns perfectly with this. The platform is designed to make trading more accessible and profitable for everyone, regardless of their experience level. Zapant understands that each trader's journey is unique, and it provides the tools and resources to support that journey.

With Zapant, you're not just getting an automated trading system. You're getting a partner that is committed to helping you navigate the trading landscape. Its robust platform, user-friendly interface, and extensive library of automated trading systems are designed to empower you to trade more confidently and profitably.

In conclusion, while automated trading systems come with their own set of challenges, they also offer significant advantages. With the right approach, understanding, and a reliable partner like Zapant, these systems can be a valuable addition to your trading strategy. Remember, the goal is not to achieve perfection, but to improve efficiency and profitability in your trading.

Wanna write your own trading system ? Check out Zapant were you can write your trading systems in minutes.


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