About AutotradingHow Does The Automated Trading Work?
Automatic trading is a fairly big area ofthe financial trading field which includes many different trading tools and methods. In recent years we have witnessed an exponential expansion of trading automatisms and we believe the in the future we’ll heavily rely on them.
We can divide automated trading in two main tools:
- Auto-trading software
- Social and mirror trading
Both tools allow a trader not to have a market analysis and to invest without actually participating trading operations, and are therefore particularly suitable for those who want to invest but don’t have confidence with the field; however it may also be useful to experts who can increase their operation with much smaller effort than before.
Commonly called robots, these software programs are based on a trading strategy. They are programmed to analyze the market, looking forpredefined configurations. These software programs can be linked to a broker’s real account or demo, allowing the beginning of the trade without intervening, or they can be used simply to receive trading signals; in this case, the trader will choose to do the operations manually.
Most of the programs are set up to be installed on PCs, and used in a trading platform. The trading platform more suitable to the operation of these software programs is metatrader, which is also one of the most used platforms by brokers worldwide. The software working in metatrader is called Expert Advisor. We recommend you read the article EXPERT ADVISOR.
These software programs can be purchased by specialized companies, which usually distribute the license but don’t explain the basic strategy the software is based on. Unlike trading signaling services, software often does not require a monthly subscription, but are available at a "one-off" payment. The cost of a robot may vary considerably: you can find robots that cost only €30-40, up to the over €1000. Stay away from the free ones:they are usually designed to be compatible with just one broker, therefore you’ll have to open a real account for it to function.
Alternatively you can customize your trading software according to your strategy. In this case if you are not a computer programmer, you should contact an expert or someone who has already created similar software.
Social trading and mirror trading
This type of trading is based on the web-based development principle developed recently, and reflects the trend that social networks have had on our lives.
In a nutshell, this trading software copies the trading methods of other presumably more experienced traders.
Often, social trading and mirror trading may be the same strategy as they are based on the same principle:an experienced trader shares his trading through platforms, and then is automatically or manually replicated by other traders, namely his "followers ".
For all the details and insights about this matter, we recommend reading the SOCIAL article
Although there are benefits in automated trading, the risks are remarkable as well, and often out of control. To rely on "third parties" without control of the situation has often been translated into a zeroing of the user’s balance.
In trading software,the number of daily transactions is often very high, and in negative circumstances this can prove fatal to our account. It’s advised to always set specific risk limits, such as the maximum amount of daily operations, maximum daily loss, but also a time limit.
Even in social trading, when we let our operations be carried out by third parties and without direct control, you may end up having unexpected surprises. It’s always advised to create aportfolio of traders worth following and who have different strategies and assets in order to diversify and reduce the risks. It is also advisable to set limits to time and number of operations.
the Analyst's answerJean Grossett - Financial analyst
Rating an EA by its upward flowing equity curve can be deceptive. In order to measure how risky a trading strategy is, one should take a close look at the strategy’s Maximum draw down, as well as its Maximal Adverse Excursion (MAE). A trading strategy’s MAE measures how far a trade moves into loss before it moves into profit or break even. A trade with a high MAE is a risky one, even with an upward moving equity curve. Maximum drawdown on the other hand indicates the farthest dip the trading account has experienced.
One should also consider how long the provider’s strategy has been trading on the metatrader signal platform
Also note that there could be lag between the provider’s quote and the subscribers quote in the form of slippage. It is therefore not guaranteed that you will get the same price quote as your service provider. This might not be much problem with a strategy that targets large profits in pips. However, scalping strategy results may not be easily duplicated in copy trade given this problem.
Finally it is important to consider risk to reward ratio, and a strategy with above 50% success rate.A strategy with a risk to reward ratio of 1:2 and 50% success rate, has been mathematically proven to yield result in the long run. Likewise a strategy with risk to reward ratio of 1:1 and 62% ratio will equally turn out successful.
the Manager's answerRobert Danvil - Investment Manager
The financial markets never sleep, operating from Monday to Friday. The crypto currency markets on the other hand have no break point in between. This market is open every day of the week. Considering that trading can be a very time consuming and stressful profession, so most professional traders turn to automated trading.
An automated trading program has all the conditions for market entry & exit, money management&risk management, and position sizing, all bundled up into a computer program.
These types of programs are formally referred to as an Expert advisor (EA) aka robot on the metatrader 4 or 5(MQL4 or MQL5) platform. Web based trading platforms or exchanges, which require an API (Application Programming Interface), refer to automated trading as algorithmic or quantitative trading. For the sake of simplicity we shall refer to automated trading as “EAs”.
EAs come in different levels of strategy/ programming complexity. It can be as simple as a crossover of 2 moving averages or the implementation of machine learning algorithms like recurrent neural network, genetic programming, or decision trees etc. EAs may take full control of the trending and other risk management decisions. These types of EAs are called fully automated EAs. However, there are others which requires human intervention, ones in a while. They are referred to as semi-automated EAs.
Expert Advisors for uninterrupted trading may require virtual hosting (VPS). This covers the risks of internet network failures and power failure.
Using black box EAs like Neural networks can be highly rewarding when successful, but can be difficult to debug or trace reasons for failures at other times. It is advisable to use (ML) machine learning strategies such as Decision tree algorithms, or Genetic programming/ Grammatical evolution. These types of EA design require a field known as feature engineering, which is a topic for another day. Their strategy results are in human readable form.
the Mentor's answerNicholas Kihn - Forex coach and mentor
The prospect of trading profitably and making money through algorithmic and social trading might sound easy however it is necessary for investors and traders to choose the trading systems wisely and carefully. It is always important to understand that a trader chooses a system, not vice versa, hence while selecting a system he/she must ensure whether it suits their trading style.
With the technology revolution at its edge, investors/analyst are looking for a quick and efficient way to trade profitably.
One should know that algos are here to stay and capitalise on a large part of the market. It is necessary that we embrace the new methods of trading and emerge as a successful trader.
When we talk about automated trading systems, there is a need to understand that these are backed by high-frequency trades supported with cutting-edge infrastructure. While these systems, capitalise on every trade execution without any human errors, they also provide the benefits of emotionless trading.
On the other hand in social trading, one must understand that the more experienced traders tend to move on their fundamental draws and often look to invest on a long-term basis. As a trader, while choosing your portfolio of trades, the selection should be strictly based on parameters like investment scale, duration, profit margins and experience in a particular type of trade. Initiating a detailed portfolio, will not only help you trade closely on the market, but enhance your profits on trades.