Trade automation, also known as Algo-trading, Autotrading or Automated Trading Systems (ATS), is basically when a computer system executes trades automatically in the marketplace, based on a trading strategy consisting of a set of rules and criteria. In other words, the computer runs a program that sends off trade-requests to the broker if- and when certain rules and criteria are met by conditions in the underlying market.
Most automated trading strategies involve some kind of technical analysis where a strategy will execute a trade once a given Technical Indicator reaches a certain absolute or relative level. You can find more information about Technical Indicators here.
Types of Automated Trading
Automated trading comes in many variations with different levels of autonomy.
1. Fully Automatic Trading
Fully automatic trading or 'robot' trading is the most common type of trade automation. This is where the computer will act based on an algorithm consisting of preset rules with regards to timing, price, trade size and any post-trade risk-management rules like Stop Loss (SL) and Take profit (TP) targets. As the name suggests, this type of trade automation involves very little human intervention once the strategy is active. The strategy can be paused, tweaked and reactivated by the trader at any time.
2. Semi Automatic Trading
This type of trade automation involves the manual execution of trades by the trader based on signals he/she receives from an automated trading system. The system will NOT instigate trades on behalf of the trader; only alert him/her if a trade opportunity corresponding to the underlying strategy arises.
3. Copy Trading
Copy-trading (or trade-following) is essentially electing to follow a (seemingly) experienced trader with superior trade performance credentials and doing what he does. This allows a less experienced trader to replicate the exact same trades as the more experienced trader in the hope that these will result in a positive performance. Copy trading normally involves paying some kind of fee to the trader he follows. As with point 1 and 2 above, copy trading can be fully-automated or semi-automated.
Advantages from Trade Automation
There are several distinct advantages to trade automation. These include:
- Removing your emotions from the trading activity
Trade on facts and rules - not your gut feel or emotion which is often likely to be wrong.
- Reducing risk of data-overload
The computer can monitor unlimited amounts of data which is physically impossible for humans to do.
- Optimizing your reaction-time
The computer will act immediately once a rule is met; no hesitation and no latedness potentially costing precious pips of your upside.
- Time saving
The computer will work for you 24/7 and ensure that you don't miss any opportunities while away from your device.
- Increasing your trading discipline
The computer does what's its programmed to do - and only that. No deviation and no 'I feel lucky' trades.
There are many more advantages and you can find a more detailed article about the benefits of Trade Automation here.
N.B. Automated trading is sometimes confused with High-Frequency-Trading (HFT) but this is just one (very specialized) aspect of autotrading involving the use of the newest technology to access the market as fast as possible. This is NOT what we offer.