Automated trading systems are programs that place orders on behalf of the trader. A trader sets the prerequisite condition for order placement based on technical analysis principles. The system will place orders automatically on the satisfaction of the necessary conditions.
The necessity for Automated Trading
Emotion and trading are like twins. You can’t separate one from the other and the former has a bad influence over the latter. The best way to nullify emotion is to avoid manual intervention and place orders with the help of an automatic trading application.
Creating strategies for Automated trading
The trader has to create strategies on his own, based on either algorithmic or high-frequency trading concepts. Similarly, a trader can also buy tailor-made automated trading applications from the market, but the reliability and cost are the major hindrances in doing so.
How to use Automated Trading Systems?
Thanks to MetaTrader. It has many built-in Automated trading Systems which can make a forex trader’s life easier. We have used a strategy based on moving average in 1-hour time frame.
The criteria set here for a long trade is for a candle to completely close above the 12-SMA. Similarly, the criteria for a short trade is for the candle to completely close below the 12-SMA. The 12-SMA is the double-edged sword here.
The blue line indicates a long trade and the red line indicates the short trade. Trades will be placed automatically when the conditions are satisfied. The exit point, stop loss or target, is the opposite signal.
Backtesting with Metatrader
Metatrader has the option to backtest the strategy too. A strategy can be backtested or tested live in a demo account. A trader can get a clear idea of the accuracy and necessary tweaks to be made in order to achieve the desired result.
This is the report and chart generated by the strategy tester by MT4. As you can see the strategy had a great run for a period and then suffered losses. The strategy means everything in the automated trading system. A good strategy can make consistent profits and a bad strategy can wipe out the trading account too. Hence, a trader easily differentiates white from black.
Custom strategies with Metatrader
The strategy discussed above is a simpler one but the user can use complicated trading strategies too based on his knowledge of technical analysis and MQL programming. (Click here to get the basics of MQL)
Key Traits of the strategy
High-frequency traders are those who require an automated trading system. A trade setup which repeats itself many times a day are the ideal ones to be automated. If not many times, it should repeat itself at least twice or thrice a day. The relevance of an automated trading system solely depends on the recurrence of the strategy.
A strategy should be applicable to different time frames and in many counters. If the strategy is applicable to more than one market, it is better. The more the applicability extends the merrier the strategy is, as it validates it.
It’s a no-brainer. The strategy should be accurate and yield consistent returns. And so it is essential to define a suitable risk-reward ratio. If a strategy is more recurring then its accuracy should be high. It is okay to observe leniency in accuracy for a high yielding but low frequent strategy.
Blessings of Automated trading
Automated trading systems certainly have lots of advantages. Hedge Funds, banks and brokerages are using automated trading systems as it makes it their life easier.
Swift Entry and Exit
Many traders have developed quick in and out strategies for scalping and day trading. Each second and each tick are valuable to those strategies. Automated trading apps can only match the speed and required by those traders. (If you are a scalper, check out our product Expert trading panel, which offers 5x order execution speed)
Every strategy created needs to be backtested for its accuracy and its vulnerability for different market conditions. A strategy created works in the specific market, say in stocks, but not in other markets like forex. Some strategies work only in specific timeframes. Hence a detailed feasibility and viability study of the strategy is made before using it on the live market. The studies offer the best insights to the trader. Therefore the decision making becomes simpler.
Emotion is the arch nemesis of discipline. Hence, they never coexist together in a system. It is important to take down emotion in order to be consistent and automated trading is the best weapon to do so. It is also easier to implement strict discipline in a system with little or no human intervention.
Pitfalls in Automated Trading
A system without manual intervention certainly has its share of bad luck. Hence, many experts have advocated against automated trading. Their reasonings are:
The reason traders are glued to their trading screen is that markets are naturally deceivable. By virtue of experience, a trader can predict certain outcomes, but not all of it. An unforeseen event can trigger volatility and instigate movement in both directions. Even after the ups and downs, a trade setup can remain the same. Therefore, a human intervention could be the need of that hour.
The 2012 glitch in Apple’s map app can be the perfect example. The map app had lots of glitches and its pinnacle was the across the street Washington monument. A giant like that would’ve definitely tested the app with sophisticated measures more than a trader could do. Yet, the mighty made a howler. A technical glitch will always be on the cards when it comes to programming. Hence, entrusting it to handle the hard earned money may not be everyone’s cup of tea.
Automated Trading Systems can take out the emotion and enforce discipline in a system.
A trader needs to create an accurate and high-frequency strategy and then program in order to build an efficient automated trading system. (Learn the syntax of MQL here)
Backtesting certainly differentiates a good strategy from worst.
Scalping and short-term trading strategies require an automated trading system as it needs quick in and out.
A good strategist can only make maximum use of an automated trading system.
Although there are many advantages, a small technical glitch can cause a catastrophic loss.