Everything you need to know about Automatic Trading [Guide 2021]

Discover our definition of Automatic Trading and how the Trading algorithms and programs used in this Trading 2.0 practice work.

Automatic Trading, a modern and rational approach to Trading

Increasingly popular in the world of Trading, automatisms, algorithms and other Trading programs have become indispensable today. Explanations.

Automatic Trading

First dethroned in the game of chess, then defeated in the game of Go, will human reasoning soon be entirely replaced by the printed circuits of his silicon creations, and this to the heart of the financial markets?

One thing is certain, Automatic Trading is gaining ground at high speed. If a few years ago Automatic Trading could only interest a few enthusiasts, today it is of interest to the general public.

What is Automated Trading?

As its name suggests, Automatic Trading consists of using algorithms to automate all or part of a Trading action.

Automated Trading is therefore in principle opposed to manual Trading, although it is quite possible to combine these two approaches in the form of Semi-Automatic Trading.

In the context of Automated Trading, the use of Trading algorithms makes it possible to define a series of conditions that, when met, will trigger one or more actions.

Practiced on all types of markets and for the trading of all types of financial products, Automatic Trading is mainly based on the history and current evolution of prices and volumes to trigger or not a specific Trading action.

This action can then concern the definition of the entry price for the position, the size of the position to be opened, or the objective on which to position a take-profit in order to take profits.

Automatic Trading is becoming more and more mature and reliable every day, thanks in particular to the improvement of backtesting solutions and methods for evaluating the performance and resilience of automatic trading strategies.

Open to both individual and professional traders, this innovative (though already relatively old) practice is enjoying real success in the world of financial investment. Today, according to JP Morgan’s estimates, 80% of transaction flows on the American stock exchanges come from Automatic Trading!

Why use Automatic Trading?

Comparing the efficiency of Automated Trading to that of Manual Trading is like leading the famous debate between Man and Robot. The term “Trading Robot” is used to designate the computer program used to place orders on the financial markets in an automated manner.

Advantages of Automated Trading

Among the strong points of the Trading robots :

  • the suppression of the emotional variable; once the algorithm has been developed and launched on the financial markets, the Trader no longer needs to worry permanently about each position taken. Thus, the emotional bias is greatly reduced and is finally taken into account only when evaluating performance.
  • speed of execution; much faster and more reactive than a human being for the passage of orders (buying and selling operations), Trading algorithms allow to seize the most ephemeral market opportunities.
  • saving you free time; although an automatic Trading strategy needs to be updated and monitored regularly, it does not require you to be constantly present in front of your screen as opposed to manual Trading strategies.

Disadvantages of Automatic Trading

Among the weak points of the Trading robots :

  • the lack of macroeconomic vision; although based on solid technical foundations, most Trading algorithms do not take into account economic news, both at company level (microeconomics) and at the level of large economic zones (macroeconomics).
  • the lack of flexibility; the code of an algorithm, however sophisticated, will never replace common sense. Thus, although emotion is a risk factor in Trading, human intuition sometimes makes it possible to anticipate certain trend reversals that would not have been handled by automatic Trading.
  • obsolescence; even if it is useless to sit in front of your screen all the time, it is recommended to update your code and its parameters regularly. Without this precaution, your trading robot could quickly become obsolete.

How to use Automated Trading?

Automatic Trading Strategies

The effectiveness of an automated Trading strategy – and by extension the algorithms developed – will depend mainly on the technical indicators and signals taken into account.

Technical indicators such as Moving Averages or Bollinger Bands are therefore very popular when designing Trading algorithms. Indeed, the latter offer a clearer view of the market trend and volatility respectively.

However, the impact of technical analysis in Automatic Trading is not limited to technical indicators, prices and volumes. Chartist figures, support or resistance zones can also be taken into account by the algorithms.

From trend following strategies to mean reversion strategies, any type of strategy can thus be automated, regardless of the time unit selected.

Want to develop your own automatic trading strategy? Get free help on the ProRealCode forums or ask us for professional and personalized programming work.

Some useful precautions

Before selecting the first Trading algorithm, some precautions should be taken:

  1. Beware of “miracle” Trading algorithms sold online. Behind them, there is usually a scam…
  2. No automatic trading strategy can be 100% reliable. For this reason, it is better to take the time to perform a complete backtest, then test your solution with Paper Trading (in virtual but real life conditions) in order to test your algorithms in various contexts.
  3. Because the financial markets are constantly changing, your automatic trading strategy must also adapt regularly to avoid generating repeated capital losses. So keep learning and innovating to stay up to date!

Remember: Risk management is of paramount importance in both manual and automatic Trading. Setting appropriate StopLoss and never betting too much of your total capital are rules that must be scrupulously respected if you want to develop your assets over the long term.

You now have a 360° view of what Automatic Trading is and what it can do for you. To go further, discover our free training on ProRealTime and find the nearly 200 automatic trading strategies hosted on ProRealCode.com!

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