Automated Trading Software - Build Alpha

Automated trading software can also be referred to as an algorithmic trading system, system trading, or automated trading system software. The trading rules are programmed before being executed by the system, and the entry and exits for trades are predefined. The trading rules can be simple, i.e., based on a crossover of simple moving averages, or complicated, requiring a thorough understanding of price action, indicators, and a programming language.

Benefits of Automated Trading Software

Minimization of Human Emotions

Automated trading software helps auto-execute trades based on predefined instructions. The trades are executed only when certain parameters are met, and there are no ifs and buts like in the case of manual trading. Thus, human emotions do not intervene in trading decisions, and help traders stick to their trading plan.

Backtesting

The trading strategies are based on certain rules which the computer follows while executing the trades. The rules framed for the trading strategy need to be specific. Thus, the trading strategy is backtested on the historical price data to ascertain its performance and accuracy. The automated trading software also allows the users to write custom programs that help them test and experiment with their trading ideas.

Discipline Perservation

Even a disciplined trader may deviate from his rules in volatile markets. Automated trading software helps in preserving discipline as emotional fears are eliminated. Automated trading also reduces human error, like buying 100 shares instead of 1000 shares which is often the case in manual trading, called a "fat-finger".

Faster Order Execution

Automated trading helps faster execution of trades when the specified conditions are met. Further, even a fractional second can lead to profit erosion in the high-frequency automated trading world; hence, automated trading becomes essential. Once a position is entered, all other orders like profit targets or protective stop losses are also generated. Moreover, most trading strategies require fast execution, like the arbitrage strategy. The system calculates the price differences between the same securities in different exchanges and places trades and allows the traders to benefit from a large order size.

Trading Diversification

Automated trading helps in trading multiple accounts or multiple strategies simultaneously. It helps to spread the risk over various trading instruments and helps to create a hedge against losing trades. It would have been quite challenging in manual trading, but the system performs all the actions in nanoseconds.

Drawbacks of Automated Trading Software

Malfunctions or Mechanical Failures

The automated trading software makes trading simple and is considered sophisticated, yet it can be fallible. Often, the trade orders may reside on a computer and never reach the server due to the internet or any mechanical failure. There can also be a discrepancy between real trades executed and theoretical trades generated by the implemented trading strategy. Thus, the traders need to analyze the equity curve to optimize their strategies.

Monitoring

Automated trading software requires constant monitoring as there can be system failures, connectivity issues, power losses, etc. Moreover, even the automated trading software can result in duplicate or errant orders by experiencing anomalies. Thus, monitoring helps in resolving such issues quickly.

Over-Optimization of Trading Strategies

Automated trading software performs trades based on backtested trading strategies. However, traders often adjust the parameters thinking a trading strategy can be 100% profitable. Thus, traders tend to curve-fit their strategies leading to over-optimization leading the strategy to fail terribly in the real markets. Hence, tweaking a trading strategy can make it unreliable.

Final Thoughts

Automated trading software helps in the automation of trading. However, automated trading software does have its pros and cons. So, traders need to focus on the benefits and efficiently use the automated trading software to make their trading process sophisticated and disciplined.

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