Automated trading systems execute positions based on predetermined entry and exit positions. Today, over 75% of stocks traded on US exchanges originate from automated orders. This software-based approach to trading is also known as mechanical investing or algorithmic trading. Our guide to automated trading software explains how it works and tips for getting started. We also list the best brokers that facilitate automated trading in 2022.
Automated Trading Explained
Automated trading is a strategy that utilizes a program to execute trades according to a set of predetermined rules. A trader will set limits, such as guaranteed stop and loss orders, using technical analysis and advanced tools.
Depending on the strategy, entry and exit rules can be rooted in straightforward conditions, such as moving average crossovers. Alternatively, they can be built on more complex indicators and requirements.
Once the rules are programmed, automated trading systems monitor the markets, deciding whether to buy or sell according to the inputted rules. Algorithms essentially follow trends and execute positions accordingly. Some systems even integrate news feeds and adjust their approach according to key headlines and announcements.
Once a trade is entered, orders for protective stop losses, trailing stops and profit targets will all be automatically generated. Importantly, if you are in a fast moving market, instantaneous order entry could be the difference between a tiny loss and a significant cost.
Automated trading services can be applied to a range of asset classes including forex, stocks, cryptocurrency, futures and options. Automated trading platforms are also available to traders worldwide, from the UK to the US and all major global exchanges accept automated strategies, including the NYSE and LSE.
Pros & Cons
For the right trader, automated trading strategies offer speed, flexibility and consistency.
- Removes emotion – one of the biggest benefits of automated trading algorithms is the fact they remove rash decision making. Some day traders will buy and sell fuelled by emotion which can often lead to errors. Automated trading systems, on the other hand, will execute positions as soon as the specified rules have been met. No emotion, just logic.
- Backtesting ability – most automated systems will allow you to test your rules and strategy against historical data to see their likelihood of success. This lets you hone a strategy and iron out any issues before putting real money on the line. It also allows traders to determine the system’s expectancy (the amount you can expect to win or lose).
- Speed – automated software offers enhanced order speed entry. The best programs are capable of adapting to market conditions and generating orders the moment trade criteria are met. In the day trading game, in particular, just a few seconds can make a significant difference to potential returns.
- Diversity – automated trading systems allow you to increase your hand by using multiple accounts and any number of strategies at the same time. This enables you to spread risk over different instruments whilst still hedging against losing positions.
- Time – whilst we would still recommend consistent monitoring, automatic strategies do not need to be as closely monitored as manual trading approaches. Once your limits are set, the robot and platform does the work so you have more time for analysis or to set up additional trades.
Of course, automated trading won’t be right for every investor. With that in mind, automated approaches are worth comparing vs manual investing to see which best suits your trading style.
Below we’ve listed some of the key limitations.
- Over-optimisation – a focus on curve-fitting leads to automated trading algorithms often falling short when it comes to live trading. For example, a lot of investors fine tune a plan with almost 100% profitable trades that don’t ever experience a drawdown. Apply it to a live market, however, and it can completely fail. This is why we recommend sticking with low value trades until you’ve ironed out any problems.
- False trends – even the best automated trading software can trigger false trends. As price reacts to unfolding developments a false trend can spiral. This was demonstrated in August 2012 by the Knight Capital group; who lost over $440 million in just half an hour when their trading software went rogue in response to market conditions.
- Monitoring – investors mistakenly think that once they have formulated automated trading strategies, they can sit back and let the computer do the heavy lifting. Unfortunately, it is not quite that simple. Be wary of computer crashes, connectivity issues, unforeseeable market anomalies, as well as missing or duplicated orders.
Most traders will opt to work with a third-party platform, though there is also the option to set up your own automated system (more on that later).
Firstly then, you will need to find an automated trading platform. NinjaTrader and Interactive Brokers are particularly popular systems but do your own research to find a platform that offers all the features you need. For example, if you want to trade on the MT4 platform, NinjaTrader is not for you because it uses CQC Continuum. Also not all popular platforms support automated trading, TradingView for example, does not.
Below are some of the most popular ready-made automated systems available in the market today:
One you have signed up with a provider, you can set trading parameters. Custom algorithms will then apply the criteria to execute trades on your behalf.
But it does not, or should not, stop there. Successful automated traders consistently monitor their positions. Complacency leads to losses. Automated systems, like any machine or technology, are still liable to glitches or other technical issues.
At the most basic level, copy trading is a simplified form of automated trading. It allows you to copy the trades of another investor. So after reviewing past performance and specific trade details, you can ‘follow’ a trader, (or better, a group of traders).
As master traders open and close trades, you will see those positions replicated in your own trading account. You can, however, adjust how much to invest, so someone with $100 can still follow the trades of someone making $1m trades.
Importantly, copy trading removes the live decision making process. All levels and order parameters are predetermined. You still need to select the traders to copy, but all other trading decisions are made by the investor you follow.
Copy trading is perhaps the most hands-off approach to automated trading.
Developing Your Own Software
If you are unable to find commercially available software that provides you with the functions you need, then another option is building an automated trading system yourself. Doing so is easier than ever before thanks to code editing tools such as VIM and online marketplaces that make it easy to find freelancers with the relevant skills.
Developing your own software brings with it several pros and cons:
- Complete control over how the software works, looks and feels
- Allows you to build complex, niche trading strategies for particular markets or assets, such as Bitcoin
- You can optimize the program to work faster than commercial software by including only the features you need
- Expensive if you do not know how to do it yourself. Like most construction projects the final cost usually ends up being higher than initial estimates.
- The software will be untested and is almost certain to contain bugs. Commercial software will likely have gone through thousands of hours of testing and will be used by thousands of traders, exposing potential problems.
- Your software might perform in unforeseen ways. Even big commercial operations have had issues with trading robots that carry out surprising trades or are triggered by other robots’ actions to commit large sell-offs.
We would recommend making sure that software available on the market does not meet your needs before you start developing your own.
If you do choose to build your own, there are two main ways: writing the code yourself or hiring a freelancer:
Programming Software Yourself
Designing your own trading software requires a basic understanding of programming as well as knowledge about how to code a trading algorithm. Software packages will help make the process easier, but all of them require a basic programming knowledge.
For knowledgeable coders one of the best editors for building your automated trading bot is Vim.
Vim is a universal text editor specifically designed to make it easy to develop your own software. It was created by Bram Moolenaar in 1991 and is based on Bill Joy’s vi text editor. It is “charityware” meaning that all its proceeds are used to help children in Uganda. Importantly, Vim makes it easy to create and edit software.
Vim is also a command-based editor – you use text commands, not menus, to activate different functions. The command-based interface allows the software to have a lightweight clean interface while still offering an extensive selection of features. The platform is suitable for both novice and experienced developers alike.
Vim’s popularity can in part be attributed to its ease of use. The tools offered make it easy to overview your code and find bugs before they cause any problems. It can also be customized to handle hundreds of programming languages and supports numerous plugins for additional features.
Hiring A Freelancer
Of course, there is always the option to hire a freelance developer.
If you choose to go down this route, make sure to hire a skilled developer that can develop functioning, stable software. Do not try to get it done as cheaply as possible. Good trading software is worth its weight in gold. A poorly designed bot can end up being expensive in the long run.
It is essential that you provide the developer with a detailed description of exactly what you expect from the trading software. Include all desired functions in the task description.
We recommend the MetaTrader Marketplace for finding potential developers. There is a long list of experienced programmers who sell their services, with developers for every budget.
If you chose to develop the software yourself then you are free to create it almost any way you want. Your freedom will, however, be restricted by the API (Application Programming Interface) provided by your trading platform.
The API is what allows your software to communicate with the trading platform to place orders. Your software will only be able to make trades that are supported by the third-party platform’s API. If a particular feature is crucial then you need to choose a platform with an API that offers that function.
Your bot will also have to import market data in some way, and in real-time without delays to effectively respond to markets. With that said, if trading decisions are based more on fundamental factors and rely on just waiting for the ‘right price’, then getting market data without millisecond delays might not be essential.
Final Word on Automated Trading
It is not hard to see why automated trading has become so popular amongst retail traders. The best software offers flexibility, consistency and speed. In today’s often busy world, it caters to the growing demands on our time and energy. Automated trading solutions are also widely accessible and suitable for both championship traders as well as beginners.
However, if you do opt for an automated strategy, do not become complacent. The importance of frequent monitoring shouldn’t be underestimated. As Jack Schwager highlighted in his ‘Market Wizards’ book series that interviewed successful automated traders, a proactive approach to auto investing was recommended in order to excel.
- Quantopian.com – a web site for researching historic stock price data and writing trading algorithms that can be backtested on that data.
- “Exploring Automated Trading: Modelling a Financial System with a Variable Degree of Automation, Display Design, and Evaluation”, Yeti Li, Nov 2017
- “Evaluation of the performance of automated trading systems based on non-parametric methods”, T.N. Batova, T.M. Sizova, A.V. Khomkov, Dec 2017
- “Professional Automated Trading: Theory and Practice”, Eugene A. Durenard
- “Automated Option Trading: Create, Optimize, and Test Automated Trading Systems”, Sergey Izraylevich Ph.D., Vadim Tsudikman
- “Electronic and Algorithmic Trading Technology: The Complete Guide”, Kendall Kim
Is Automated Trading The Right Strategy For Me?
If you’re looking for an approach that enables you to trade according to predetermined limits, that offers flexibility and utilizes the latest technology, then automated trading strategies might be a good option for you. See our list of the best automated trading brokers to get started.
Can You Automate Day Trading?
Yes, traders can adopt automated systems for day trading. Some traders develop their own systems whilst others use third party platforms. There are lots of options available to traders of all levels but make sure you research a provider thoroughly to ensure they offer all the features you are looking for.
Is Automated Trading Difficult?
Trading is never easy, no matter how long you have been in the game for. Automated trading does offer some benefits, such as removing some of the high-pressure last minute decision making. It also offers traders more flexibility compared to other strategies as it does not require such close monitoring. But as with any strategy, to succeed you will need to dedicate time and effort.
Is Automated Trading Legal?
Automated trading is legal. It is recognized as legitimate by regulatory bodies around the world. With that said, not all online brokers permit automated trading on their platforms. See our list of supported brokerages to find a suitable provider.
Do Automated Traders Make Money?
Some automated investors will make money and some won’t. There are so many factors that contribute to long-term trading success but a method you understand and have confidence in is a good place to start.