The Many Faces of Automated Trading



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Have you ever wondered what people mean when they talk about auto trading? Don’t feel like you’re out of the loop if you do because the term has several meanings. Traders who praise the wonders of automated trading sometimes set their brokerage accounts up in such a way that a robot makes most of the buying and selling decisions, or even all of them via a social or copy account.

Others who claim the title of being an automated trading advocate simply build a few conditional orders into their accounts but do the rest of the work manually. And in between those two extremes, there are multiple gradations of trading automation.

Limited automation with conditional orders

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Conditional order placement does not use any kind of expert advisor program. Instead, investors merely create one or more parameters for executing a purchase or sale based on chosen signals.

For example, you could set a rule like whenever XYZ Corp’s stock price rises above the 200-day, exponential moving average, you can purchase shares at market, then sell when the price goes below the 200-day EMA. It’s easy to see that these sorts of simple rules can take an infinite number of forms. What they all have in common is that each one is a stand-alone command that you create and dismantle at your discretion. Conditional orders have been a mainstay of the online securities markets for more than two decades.

Intermediate activity with expert advisors

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Expert advisor programs can fully automate both the analysis and execution of orders within an account, provided the platform is designed for the purpose and the brokerage firm has direct access to markets. While a standard expert advisor can do a wealth of technical analysis with buying and selling, you still have the option to turn it on or off whenever you desire.

When it comes to creating an expert advisor it’s possible to use pre-configured versions or build your own, though the latter can be a challenge.

Full automation with Social and Copy algorithms

Some brokerage firms allow clients to engage social and copy trading. The latter is a subset of the former. Copy traders simply sign up via the brokerage to make identical purchases and sales as a designated leader.

You can set up your copying so that dollar values are smaller, larger, or the same as the leader’s amounts. Social traders (who don’t engage in copying a leader) often join in chat rooms and forums and make coordinated buys of a particular stock. Or, they simply share knowledge and tips about strategies.

The Ups and Downs

Automated trading is not for everyone, but in today’s fast-paced world of online everything, most non-professional investors use it to some extent. Conditional orders, as noted above, are quite commonplace. Even the use of expert advisors and fully automated platform trading is catching on with casual trading enthusiasts.

Like every other kind of profit-making endeavor, there are pros and cons that go along with the use of any type of auto trading system, whether simple, intermediate, or complex versions. Here’s a shortlist of the good and bad aspects:

  • Pro: Back testing can be virtually built in to the process when most of the decision-making is on auto-pilot.
  • Pro: Users of automated trading don’t have to worry about letting their emotions get in the way of their day-to-day buying and selling of securities. When a robot or set of conditional rules are in the driver’s seat, there’s no chance of developing a trigger finger (trading too often) or becoming reluctant to execute a given trade.
  • Pro: When you automate, it’s much easier to make speedy orders. That’s because the bot, or the conditional order command, instantly executes a purchase or sale whenever the conditions are met.
  • Pro: If you prefer consistency in the way you acquire assets for your securities portfolio, and eliminate them when it’s time to sell, automated trading can be a fast, simple way to achieve it.
  • Con: Setting up a system based on back testing can be tricky and end up delivering poor results. In the real world, statistically tested data does not always turn out to match the on-paper results.
  • Con: Even when you feel secure in the knowledge that all your decisions have been automated, you still need to monitor the program for mechanical glitches and breakdowns. Automated trading is not a set it and forget it arrangement. Human eyes are needed, even if only to peek in on how everything is going.

There are dozens of ways to build an automatic decision-making system within your brokerage platform. Some are much more complex than others, but all serve a worthwhile purpose as long as you monitor them for performance and re-write rules when necessary.

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