Automatic trading or mechanical trading systems allow traders to use specific rules for their trade entries and exists that once programmed, are automatically executed by computer. The rules for entry and exit can be based upon simple conditions or can be complex strategies that require a great understanding of the programming language used on the specific trading platform.
An automatic trading usually requires the use of software that’s linked to an access broker and the rules are written in the platform’s language. For example the Trade Station platform uses the Easy Language, while the Ninja Trader platform uses the programming language Ninja Script. Some automatic trading platforms use wizards that allow users to make selections from a list of technical indicators set to rules that can be automatically traded.
Advantages of Automatic Trading
Automatic trading allows a person to minimize their emotions during the trading process. With emotions in check the plan for trading is easier. The trade orders are only executed once the rules set by automatic trading system are met. There’s no hesitation on the traders part who might not be willing to “pull the trigger” on a trade due to their emotions at the time.
Automatic trading allows for back testing. You can apply rules set by the system to past historical data and see if the rules would apply today. The computer can’t make guesses so testing the results of nay programmed rules against real world data figures allows the system to be set up in the best way possible. Trades can then test the rules before applying them to real world money transactions with the system.
Automatic trading allows for disciple in the trading process even when the markets are volatile and a trader may be ready to make snap judgements based on the current data. The fear of a loss often drives emotions. The automatic system ensures that discipline is maintained and since the system follows data exactly there’s no chance for human input errors during times of panic or uncertainty.
The system allows for consistency in automatic trading. The system allows for a plan to be followed. A trader who has taken losses may skip the next trade when this could be the big winner. This system keeps the plan on track even through the rough periods of trading with consistent results. This system allows for improved order speed and diversity in the trading with the ability to manage multiple accounts for example.
Disadvantages of Automatic Trading
Automatic trading system is like all other mechanical devices in that they are prone to failure. A system can become corrupted; get a virus or the data may be lost. The servers may be inaccessible when the Internet connection is lost. This might mean the loss of a critical order and income when the system cannot be accessed in a timely manner.
Automatic trading doesn’t require monitoring so it’s difficult to see discrepancies in trades. Errors may occur in an order, an order could be duplicated, or even missing in the system. A monitored system will show these errors while in the automatic one they remain hidden until the trade is made and it’s too late.
An automatic trading system may be over optimized with the use of back testing. The system might perform well in tests but have poor performance in real world trading. Data may be tweaked so much in back testing that that data is no longer useful in actual live trading sessions. The back tested system might have what is called a perfect plan for trading but because it hasn’t seen actual live trades it might fail.
The Trader Must Decide
Automatic trading has several advantages and disadvantages and it’s up to the trader to decide if this type of system is something they wish to use or not. In the age of the Internet automatic trading has many great uses but one must also weight he drawbacks of such a system when it comes to their portfolio and potential income gain or loss from using such a system.