Automated trading systems let traders trade using programmed rules and conditions for both entry and exit trades.
Once the rules and conditions, which the trader himself sets, are met, the trade will automatically be executed by the computer.
When using automated trading systems, traders use precise entry, exit, and money management conditions to let computers do and monitor the trades.
These systems have a ton of benefits. The following are the most appealing advantages of using automated trading systems.
Removing Emotions Out of the Equation
Automated trading systems enable the trader remove the emotions out of the equation throughout the trading process.
And when emotions do not mix with the trading process, the trader has an easier time following his trading plan.
That is, the trader will not be able to hesitate of second guess the trade. That’s because the system automatically executes the trade.
Apart from helping the trader execute the trade without hesitance, automated trading can also minimize the chances of overtrading, which refers to trade addiction or buying and selling at every perceived opportunity.
Backtesting the Strategy
Backtesting is the act of applying, or testing, the trading rules to historical data from the market. The goal is to determine the viability of the strategy.
Remember that when designing an automated strategy, the rules you put should be absolute. Never leave room for any ambiguity, vagueness, or interpretation.
It’s easy to see why: computers after all run on programs and it cannot guess. You have to “tell” it exactly what to do.
With backtesting, you can test these rules on previous market conditions to see whether it works before you start risking your money.
Also, backtesting lets the trader to evaluate and tweak the strategy to get its best form. You also can determine the plan’s expectancy, or the average amount you can expect to win or lose per unit of risk as you use the strategy.
Reinforcing Discipline
Again, because the computer follows strict rules and removes emotions out of the trading process, discipline is preserved even in the most volatile of trading conditions.
That’s because even if the trading plan has great potential to be profitable, traders that ignore the rules are changing the plan’s expectancy.
Keep in mind that there’s no trading plan that wins a hundred percent of the time. You will always incur losses, which can be traumatizing.
Boosting Order Speed
Because computers can respond instantaneously to the changing tides of the financial market, automated trading systems can facilitate trading orders as soon as the rules are met.
This is particularly helpful because, more often than not, getting in or out of a trade for a few seconds earlier or later can have a devastating impact on the trade’s outcome.
The moment the computer enters the position, all of the orders are automatically generated. These orders include protective stop-loss orders and profit targets.
The market can move wildly, and it’s quite frustrating to have a trade reach profit targets or move past a stop loss area before the orders have been plotted.