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Getting started with Auto Trades

Written by Jonathan Araújo
Updated over 2 years ago

What is automated trading?


Automated trading uses computers to generate trading signals, send orders and manage portfolios using algorithms with or without human intervention. Sophisticated electronic markets/platforms are integrated by the algorithms to execute trades in a similar fashion as done in electronic trading.


History of automated trading


Speaking about how automated trading began and went on to become so useful for traders, let us see one by one the journey of “automated trading” from the beginning:

  • It was in the year 1949 when Richard Donchain first introduced the concept of an automated trading system. He made use of a set of rules for buying and selling the financial markets’ assets.
  • Then, it was in the 1980s that rule-based trading became popular amongst traders as famous traders such as John Henry and the likes started using rule-based trading strategies.
  • It was in the mid-1990s that the improvised versions of automated stock trading models became available for purchasing. These trading models also raised the accessibility for retail investors in the financial markets’ trading domain. However, in today’s time, the automated trading system is taking care of assets across the globe.


    • Working of automated trading


    Automated trading works in a simple and systematic manner that is completely based on the commands/instructions/parameters set by the trader. Let us see how the automated trading system works stepwise:

  • You will need to set the parameters of your trading strategy after you have signed up on Our website.
  • Then, on the basis of trading experience, You will create entry/exit positions which will be done via an instructed input.
  • These rules and conditions will be based on the time of the trade, the price at which the entry and exit positions will take place and the quantity of trade.
  • Our algorithms will place the trade on your behalf every time the conditions are met.
  • Our automated trading system will constantly keep monitoring the financial market prices, trades etc. and will execute the trade whenever the predetermined instructions/parameters are met.

    • The following diagram explains the entire process of an automated trading system:


    Automated trading

    Automated trading



    Difference between automated and algorithmic trading
    Let us find out how automated trading and algorithmic trading are different from each other with this table:

    Automated Trading

    Algorithmic trading

    The instructions can not be in detail. For instance, you can automate the trade execution once and not put conditions unlike trading with algorithms 

    The computer program is used to follow a defined set of instructions or rules to calculate the price, quantity, timing and other characteristics of the orders. In other words, trading signals (buy/sell decisions) are generated based on a set of instructions.

    The universe for trade execution is limited to one of the financial markets, say stock market and in one of the products, say futures

    Algorithmic trading efficiently increases the universe being traded by an individual trader. For instance, the algorithms can be coded to execute trades in more than one financial market such as in stock, commodities, crypto etc. and for a variety of products such as futures, options etc.

    Constant human intervention is needed every time whenever a new condition is needed to be set

    Very less human intervention is needed since the algorithms are coded with all conditions at once



    Example of automated trading and algorithmic trading


    In automated trading, the orders are executed electronically according to the set parameters and instructions as we saw in the image above. For instance, automated trading does not work with the detailed instructions regarding price, volume etc. of your preference. The automated trading system can be instructed to enter the trade at 2 pm and exit at 3 pm. That’s it!

    Whereas, in the case of algorithmic trading, you can create a set of rules and conditions via algorithms. For instance, you can create the algorithm to enter the trade in case the price goes below 50$ or else exit the trade. Therefore, the decisions can be taken by keeping into account the details regarding price, size of the position etc.


    Prerequisites for practicing automated trading


    You can find the steps for learning algorithmic trading and learn this contemporary process step by step. There are not so many prerequisites for learning automated trading since learning might be difficult but is doable. Before you begin practicing automated trading, these are the prerequisites:

  • Knowledge of markets
  • Strategy creation
  • Coding experience

    • Knowledge of markets


    Having a good knowledge of markets or being a manual trader already helps in becoming an automated trader. The manual trading experience helps because automated trading requires the trader to automate the trade order execution on the basis of understanding of the market.

    For instance, if you have manual trading experience, you will be able to analyze whether buying a particular stock at a particular price will lead to desired returns or not. After making the decision, you will be able to automate the system accordingly.


    Strategy creation


    The other prerequisite for beginning the practice of automated trading is knowing the strategy creation process well. All the trades must be executed with the right strategy (based on the situation of the market and performance of the stock, commodity etc.) for the best outcome.

    There are several quantitative trading strategies and models that you can learn to be able to use the most effective strategies for your portfolio.


    Coding experience


    A good coding experience is a must for automated trading since, then, you get the option to automate all the strategies via algorithms. Python programming is considered to be the most popular programming language in today’s time.

    By learning the basics of python programming, further, you can practice coding for your trading journey. Moreover, practicing well can help you become better at programming your automated trading strategies.


    Benefits of automated trading


    Automated trading is an approach that is faster and more efficient than manual trading. Let us see the benefits in detail, which are:


    Backtesting


    Allows backtesting which is an important inclusion for a successful trading strategy with favorable results. When you backtest, you find out if the strategy is favorable on historical data or not. With the help of the results on past data, the strategy you have built is validated for current data. Hence, better outcomes.


    Emotions


    Lesser emotions play a big role while trading. Emotions such as fear, greed etc. drive your trading decisions in a manual approach to trading. Whereas, in the case of automated trading, emotions are kept at bay since the computerized system takes care of trading according to the set preferences by you.


    Approach


    More disciplined approach is seen in automated trading since in manual trading, it is not always possible for humans to follow a disciplined pattern due to situations such as volatility in markets.

    During volatility it is possible for the manual traders to make decisions based on incorrect expectations of market falling or rising in future. But, with a trading plan or trading instruction given to the automated system, one can maintain a disciplined approach.

    This disciplined approach will allow you to execute trades with backtesting and a proper trading strategy.


    Time


    Moreover, automated trading saves a lot of time for the trader by monitoring the market quickly (more quickly than is possible for any human being). This helps in finding out the best opportunities without wasting much time.

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