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Have you often been annoyed that you didn't close a position with a small loss while trading, instead of letting it run further into the red (... in the hope that the trade will turn into positive)?
Automated trading manages to keep people out as a factor in trading. Computer programs handle trading, i.e. buying and selling securities that are electronically forwarded to the stock exchange.
Trade Without Emotions
The computer programs are able to react to changes in the market. Automated trading is also known as algorithmic trading.
There are different degrees of automation that decide which aspects of the order, such as volume, price or timing, the computer can determine itself.
Of course, even automated trading is no guarantee of eternal profits, but the approach of leaving out people's emotions and psychological behavioral patterns offer enormous opportunities.
Definition of Automated Trading
What does automated trading mean?
In automated trading, a distinction is made between institutional investors and private investors.
Foreign exchange or forex trading, in which two currencies are compared with one another, is mainly operated by banks or credit institutions. Forex is the only market that is open 24 hours a day. It is characterized by low fees, rapid execution, and high liquidity.
Investors speculate on the price movements that international currencies are subject to, always betting on a currency pair and assuming whether it will rise or fall. This happens directly between the market participants.
Automated trading in various asset classes
Only since 2008 has it been possible for private investors to trade on the stock exchange using automated trading systems, i.e. to buy and sell. Since then, the exchanges have switched from traditional to automated trading.
Private investors can have their own trading robot developed in order to then trade with CFDs (Contract for Difference). This is seen by experts as an important step because, before automated trading, the risk for investors was significantly higher.
The stock and stock exchange prices used in CFDs match those of real stock exchange trading but are not listed. Thus, no real values are acquired by the investor, which means that the legal regulations differ.
Monitoring takes place here, but no regulation. The market in which trading takes place is the OTC, the over-the-counter market.
In doing so, you usually estimate the price movements and evaluate their differences. So the investor tries to achieve a short-term profit through speculation. The funds are usually secured on the real stock markets in order to maintain liquidity, whereby security, a so-called margin, is deposited.
The futures trading is suitable for private and institutional investors and introduced a form of futures is traded on the exchange. Here a binding contract is concluded between two parties, whereby a seller undertakes to deliver goods in the future and the buyer to accept them.
There are financial futures contracts, and commodity futures contracts, the commodity futures.
What advantages does automated trading offer?
Automated trading is traded via a computer, but the computer itself cannot think or decide. That is why it is only the executive element for the things that it receives from an Expert Advisor.
Such an Expert Advisor, i.e. a fully or semi-automatic trading system contains the knowledge of a large number of stock market experts in its programming.
Many thousands of different processes are stored here, which can react in real-time. This happens in a split second while the Expert Advisor continues to analyze. A human cannot do this.
High speed
Automated trading, therefore, offers the possibility of being able to place trades with great speed.
In addition, the amount of essential information that is tracked and processed by the computer is much higher than with human intervention. This also lowers the cost of the transactions made.
The trading computers are able to operate 7 days a week, 24 hours a day. In this way, the investor can always stay “on the ball” when trading, which he would not be able to do without the help of the trading robot.
There is no delay in receiving and entering changes as the computer reacts in real-time.
Trading without emotions
The human factor cannot be completely left out in automated trading, because the programs that are used in automated trading have also been installed by human hands and are put into operation and monitored by them.
People are able to turn a program on or off when they don't like what it is doing - a dangerous factor as it can lead to losses which are then blamed on the program.
However, the lack of emotion in a computer program is the greatest advantage of these trading platforms, because the computer prefers logical calculations to intuition, even if this is sometimes missing.
The machine thinks but does not have the human mind. It works according to the parameters entered and, in contrast, is significantly faster than humans.
The greed, which in the past drove private investors to great risks and in some cases led to high losses, has disappeared with the emotionless machines. However, if you are looking for advice and only feel that you are in good hands when someone adds understanding and intuition, you should prefer a semi-automatic trading variant.
Thus, trading on a trading platform by means of automation has its great advantages, but naturally also involves risks.
Strict risk and money management
Strict risk and money management are required to be successful. Money Management is designed to explore the correct position size for its own commitment, so the right investment.
Risk management, however, is concerned with minimizing the risk for the entire portfolio. So it is calculated when a market exit would be favorable.
The risk management secures the profits achieved by paying attention to the sell signals for the individual shares at the right time. Put simply, “stops” are set that send out sell signals. There are absolute stops that lie at a defined lowest value.
Trailing stops take a relative share value into account, so that the current value e.g. B. is reduced by a few percent or the stock value is used that was current a few days before.
Such a trailing stop thus accompanies the share during a price increase and secures its profits. Volatile trailing stops work similarly, but they also take into account the intensity of fluctuations in the market, the volatility. This describes the intensity with which a share exhibits deviations in one or the other direction of its price development.
The trailing stop for this variant is applied after calculating the volatility below it. In the case of a normal trailing stop, a stock that is subject to strong fluctuations would send out a sell signal, and a short time later would give a buy signal if there was a positive fluctuation.
Money management, which has been used in futures trading since the late 1980s, requires a trading system that has a positive expected value. The optimal use when trading on a trading platform is determined by money management.
That is why a low-risk behavior is preferred in money management in order to avoid a loss or even bankruptcy of a trader while trading. The optimum is always different depending on the system used and must therefore be recalculated for each system.
Disadvantages of Auto Trading
What are the disadvantages of automated trading?
The apparent knowledge advantage of automated programs is also, a disadvantage, because they lack human understanding, which means that they have no flexibility whatsoever.
That is why a new investor should first test automated trading with virtual money, since even a trading robot cannot do without market concepts, the determination of chart patterns, and knowledge of the best trading currency.
Nothing for those new to the stock market
Spontaneous profits from short positions cannot be obtained due to a lack of configuration. It is also speculated that automated trading will help fuel negative price fluctuations automatically.
Those who value advice and expert information should use a trading robot that is managed by a trader, as a lack of advice and expertise can sometimes also be a disadvantage.
Above all, every trader should be aware that there can be no trading system with a guaranteed profit!
Trading platforms for traders
Choosing the right trading platform
When choosing the right trading platform, the investor should note that the program should offer opportunities for personal development. It must be possible to develop and program individual trading strategies.
Investors who are not familiar with programming up to now should also be taken into account. Common programming languages are C # and EasyLanguage.
Numerous trading systems in automatic and semi-automatic form is offered, which offers the right thing for beginners and experts. If you want to trade forex as well as futures or CFDs, you should choose a provider that covers all points.
Attention must also be paid to real-time trading. Every platform acts at different speeds - the faster, the better, the more real. Because exchange rate fluctuations happen within seconds and quick decisions decide about profit and loss. A reliable and fast platform is therefore essential.
Forex trading platforms
In real sense, platforms that are suitable for Forex trading are packages with software. These provide the investor with all possibilities to conduct foreign exchange transactions, place orders, and trade in real-time.
This is usually done through your own internet connection. A good forex trading platform should meet the needs of the respective user and ideally, be available free of charge.
The multitude of different user requirements is covered by a wide variety of platforms. Each offers different possibilities. There are simple platforms that use simple interfaces or, as an exact counterpart, those that are heavily animated or offer complex analysis tools.
The individual needs and preferences naturally also determine the selection of the trading platform, purely from the point of view, but more important are the existing options for stock exchange trading.
There are no basic criteria for selection, but there are some clues that the actor can use as a guide. The forex trading platform should be easy to use and provide a reliable service that rarely shows failure.
Real-time prices are important because this is the only way to ensure reliable trading with the best possible conditions. That is why it must be possible to record and cancel orders quickly. The account management functions should be comprehensive and quick to use for this purpose.
A good forex platform makes a market analysis, whether technical or fundamental, easier for the user. The Forex broker preferred by the investor should offer him the trading platform or at least offer support.
Trading platforms for CFD
The first impression counts - even with a platform for CFD trading. When the user comes to such a platform, he must have the feeling that he can quickly gain an overview there. Of course, a first impression is not enough. Before choosing the right trading platform for you, you should consider some criteria.
When choosing the right platform for CFD trading, as with forex trading, good operation of the platform or trading software is paramount. But it is also crucial which features and tools are available for trading with the respective platform. The types of orders offered should be checked in advance.
Some software is chargeable, others do not incur any costs. Usually, the CFD broker provides them free of charge. Furthermore, the investor should find out whether stop orders are supported by the trading platform and whether these are guaranteed.
The software should fit the individual private investor and guarantee to trade in real-time. It also has to be a stable platform with only minimal downtime.
But the service also needs to be checked. Can you establish contact beyond the internet in an emergency? And is there a reference person? If there is a contact person for emergencies, they should be available around the clock.
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