Automated trading systems can let you have precise entry and exit points in your trades, while also letting you follow money management rules you have imposed on yourself. One of the biggest appeal of automated trading systems is that it can get rid of some emotions out of trading (since the trades are automatically placed once certain conditions are met).
In this article, we’ll talk about the advantages that you can get from an automated trading system.
Automated trading systems lower the emotions throughout the trading process. Here’s how it works: you determine some conditions whose occurrence would trigger the start and end of a trade. That’s it. The program will take over from that point on, and it will only need minimal interventions from you.
This keeps emotions in check, making it easier for a trader to stick to his or her trading plan. Aside from the help it gives to traders who are scared to pull the plug, an automated trading plan also lessen a trader’s tendency to overtrade, which refers to buying and selling at every chance.
When you’re performing some backtesting, you’re applying your trading rules to historical data with the view to check the viability or effectiveness of a trading idea.
Since a computer functions the way you program it, there’s really no room for interpretation. All rules should be absolute when it comes to automated trading. You can take these precise set of rules and test them on historical data before you risk your money in live trading.
Careful backtesting lets you evaluate and fine-tune a trading idea and in order to determine the system’s expectancy, which is the average amount that you can expect to win or lose per unit of risk.
Since you have established trade rules and the execution of trade is performed automatically, the discipline that is very much necessary is preserved even during a volatile period. Discipline is often lost because of various emotional factors like fear of taking a loss or the greed to get a little more prpfit from the trade. Automated trading aids in preserving discipline because a trading plan is exactly followed.
One of the largest challenges in trading is to plan the trade and trade the plan. Even if the trading plan is oh so good, some traders who ignore some rules are also changing the expectancy that a trading plan would have had. There is no trading plan that wins a hundred percent of the time. You have to accept losses because they are part of the game.
However, a trader might find it traumatizing to lose three or four times in a row, and he or she might decide to just ditch the next trade. If that next trade would have won him some profits, he has already destroyed the expectancy of his trading plan. Automated trading systems let traders achieve consistency by trading the plan.
Faster Order Entry
Since computers respond almost instantaneously to the changing market conditions, automated trading systems can generate orders as soon as the trade criteria are met.
Getting in or out of a trade in just a few seconds can make a huge difference in the trade’s final outcome. As soon as the position is entered, all of the other orders are automatically generated, including the protective stop losses and profit targets.
Markets can move quickly and it’s quite demoralizing to have a trade reach the profit target or blow right pasta stop loss level before the trade can even be entered.