“Every trader has strengths and weaknesses. Some are good holders of winners but may hold their losers a little too long. Others may cut their winners a little short but are quick to take their losses. As long as you stick to your own style, you get the good and bad in your own approach.” – Michael Marcus
Since the advent of technology, there have been a plethora of advancements in diverse fields, ranging from agriculture to health care to space science.
Its humongous progression is also witnessed in the field of trading worldwide.
With a plethora of applications including automated reasoning to building various computer software to data processing, technology has been used not only to achieve unbelievable speed but also with pinpoint accuracy.
It is only natural to feel overwhelmed if you try to always keep yourself updated regarding the changes in the stock market due to its high rate of fluctuations.
It is inevitable for the novice traders to feel this way and this might also be the case of some of the regular traders too.
Any successful online trading demands your time and energy, without which you are very likely to run behind in the never-ending race.
If we do a reality check, then, managing to trade on your own by keeping a track of when to sell or buy stocks depending on the variations of the market, while juggling with your day job and household chores, it does become a bit more than just hectic.
This real-life problem called in for the advent of automated trading.
With advanced robot trading that trades on your behalf and earns your profits, automated trading has come to a relief, thus making your life easier.
Read on to understand in-depth about what Auto Algorithmic Trading System is all about.
What is Algorithmic Trading?
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The method that uses pre-programmed automated trading instructions in pursuance of sending small slices of order, with the aid of accounting variables like price, volume, and time, is known as algorithmic trading.
In other words, this kind of trading uses a specifically built computer program that aids in submitting trades to an authorized exchange without requiring any human intervention.
A particular set of instructions, known as algorithms, are preloaded in a computer that is programmed specifically to carry out the trading automatically.
There is a plethora of instructions including quantity, price limits, timing, and more, which eventually guarantees you to make the most profitable trade.
We are human beings, subjected to a range of emotions that at times make us vulnerable and impulsive, which can have a negative effect on our trading.
We might become too excited about having gained a certain profit and take our next trading decision in haste with the outburst of such emotion and end up suffering a significant loss.
This particular, seemingly uncontrollable problem of being a human is completely ruled out when the trading is being carried out by a computer.
Being devoid of any such emotions, the algorithmic trading system keeps on making justifiable trading decisions on your behalf that ensures you to earn profits.
Used mostly for High-Frequency Trading (HFT), this type of trading usually spans over a larger market area, sometimes trading across multiple markets with high-speed decision parameters set, they aid you in enhancing your chances of gaining a profit on almost every trade.
Also Read: Money Markets and How to Invest in them
Understanding the Mechanism of Automated Trading Systems
On the basis of a number of determining factors, such as the theoretical buy and sell prices and the current market price of an option, the automated trading system decides whether a specific order should be submitted or not.
The algorithm is designed in such a manner that it ensures you to gain a profit in almost every order.
A range of theoretical sell and buy prices are stored in a look-up table for some specific latest market price of the underlying security.
In a similar manner, when the look-up table indexes a new theoretical price, then the price of the underlying security alters accordingly.
This aids in preventing any unnecessary calculations that could have led to slowing down the automated trading decisions.
Depending on the specifications that you provide, once the system enters a trade, trailing stops, orders for protective stop losses, and profit targets will be generated with the aid of your trading algorithms automatically.
How does this affect you?
Having gained a significant amount of trust and numerous appreciations all across the globe, the automated algorithmic trading systems are hugely popular among a myriad of institutional investors.
This particular type of trading calls for a high-level technology that is unfortunately not accessible by small-time investors like the retail investors.
On the other hand, even if the small-level investors do not participate in algorithmic trading, they can still feel the impact of High-Frequency Trading (HFT).
This can be felt mainly because of the following reason – an HFT system is capable of executing a plethora of trades and even benefit from the investor’s final price in the same amount of time in which an investor would take to carry out a single buy or sell order.
Downside – The volatility of a market is increased because it can trigger a mass sell order with even the slightest fall in the market, which can lead to a crash.
Always keep in mind that the auto algorithmic trading system is a specific market strategy and using this system is not advisable for long term investors.
Who Should Use This Trading Software?
The HFT system utilized by the algorithmic trading software is largely used by leading trading firms including a myriad of investment banks, hedge funds, and proprietary trading firms.
The trading software is either purchased from third-party providers or is directly offered by brokers.
Advantages of Auto Algorithmic Trading Systems
Among the plethora of advantages that this trading system house, a list of the most beneficial aspects are listed below.
- Ruling out the emotional factor: Among all the other significant advantages of an auto algorithmic trading system, the ability to rule out the human emotion while trading is paramount. There are a plethora of day traders who buy or sell in the market on the sheer basis of their feelings, which they prefer calling their ‘gut feeling’. This often leads them to suffer unnecessary losses, which could have been otherwise avoided if the trading decisions were taken more judiciously.
- The ability to backtest: In pursuance of testing the likelihood of success, almost all the automated algorithmic trading systems will provide you with the ability to test your strategies and rules against the plethora of historical data. With the aid of this functionality, you are further enabled to hone an ideal strategy and also straighten up any creases before you end up investing real money on the line. This helps you to anticipate correctly about your win or loss in any given situation by determining the life expectancy rate from the system.
- Maintaining consistency: It is crucially imperative to maintain consistency in any trade-in pursuance of gaining profit. This leads us back to point 1 where we discussed the ‘ruling out the emotional factor’. If human emotions were involved in any trade, then it would only be obvious to get cold feet on the next trade if you suffered losses in your previous three to four trades. With the advent of this trading system, that obstacle is also ruled out by maintaining a consistency where each and every step is taken in an informed and calculative manner.
- Maintaining speed: As mentioned earlier, this system enables you to run trades in a plethora of markets at the same time as one would take to buy or sell in one market. This hugely enhances your trading capability by maximizing the speed.
This is done with the capability to automatically change to various market conditions and eventually generating orders as soon as the criteria for trade are made.
Understand that within a small time span of mere seconds, you can witness a humongous difference to the potential of either winning or losing.
- Ensuring a winning formula: People often spend months and even years to make their strategy for winning a perfect one. Now with the help of the auto algorithmic trading system, the efficiency of your winning strategy is enhanced manifold. Due to the state-of-the-art technology used in this system with a profit-oriented algorithm, the chances of you gaining significant and consistent profits also get ensured.
Disadvantages of Auto Algorithmic Trading System
Although the auto algorithmic trading systems provide you with the best-in-class trading capabilities, they do have a couple of weaknesses that you should be aware of before you begin.
Read the following points to be aware of the few disadvantages.
- Mechanical failures: You have been informed about the mechanism of the auto algorithmic trading systems and the theory behind it which broadly encompasses setting up the specific software in the computer, program the required rules and strategies, and then you are all set for the software to run the trade for you in blazing speed.
This is a sophisticated method of trading yet it cannot be infallible every time. If your Internet connection runs down, then the trade order which was supposed to be sent out to the market resides only on your computer and not on the server.
This could lead you to miss some significant trading opportunities. You could also experience a discrepancy between the order entry platform component and the theoretical trades generated by the strategy.
Advice: It is advised to start your trade-in smaller sizes and gradually work up to larger amounts.
- The risk of over-optimization: When it comes to living to trade, then at times it can fall short of the mark, which otherwise looks great in theory with the focus on curve-fitting that leads to automated day trading algorithms. For instance, a specific strategy can look almost perfectly profitable in theory wherein the chances of a drawdown are almost next to none. When this strategy is applied to a live market then it may fail you completely.
Advice: You should wait till you have ironed out all the possible creases in the real trade world before you invest in the high-value trades to avoid such losses.
Always stick to the low-value trades in the beginning.
- Monitoring: People often form the misconception that once their automated day trading strategies are set and they have formulated them properly, they can sit back and relax while their computer does all the work. This kind of attitude often leads to major failures in the world of trading.
Although it is true that the core work of trading is handled by your computer once it is set, it still requires monitoring.
There could be a plethora of issues that might intervene in the trading process that needs to be checked upon vigilantly.
Connectivity issues to computer crash to power loss or even some technology failures are some of the most common hindrances that the computer might face which hinders trading.
These anomalies should be identified and resolved immediately.
Advice: Be cautious about the above-mentioned anomalies and call in a technician immediately once you witness any such technical failures to get your trading back on track safely.
Which are the Best Software Providers?
There is a myriad of automated algorithmic trading system software providers in the market and some of the renowned ones among them are:
- Presto ATS
- Omnesys NEST
In a Nutshell
The auto algorithmic trading systems, for a myriad of reasons, are the best available trading platforms but they do also come with a couple of drawbacks. Weaknesses need to be taken care of meticulously during real-time trading.
This system of trading should not be mistaken to be a substitute for cautiously executed trading.
Always keep in mind that in pursuance of gaining the maximum benefits from this system, you need to have a proper understanding, knowledge, and experience in real-world trading.
Stockquantum was founded by Dharmendra Mukati in 2018. I am a Trader and Investor in the last 10 years.
I am writing here about stock broker review, broker comparison, IPO investment, Crypto currencies, technical analysis, fundamental analysis, sub brokership, mutual fund, personal finance, and our experiences.