Understanding How Automated Trading Systems Work

All You Need to Know on Automated Trading Systems

Automated trading systems are taking over financial markets. A study found out that they account for substantial volumes of trade, especially in the commodities and futures market. Thus, they are increasingly being embraced by traders. The reasons that traders give for their widespread use include the convenience and accessibility that they offer.

Emerging Controversies

The rise in the use of automated trading systems has sparked debate all over. Traders who are used to the manual system treat them with great contempt. A section of traders in the futures market is also skeptical of the workings of automated systems.

They protest that the market forces of supply and demand are no longer being used in the determination of prices. Other sections of traders, especially from the derivatives market, have suggested that a regulatory framework should be put in place to lessen the risks of associated with the malfunction of automated trading systems.

What is an Automated Trading System?

An automated trading system enables traders to set specific rules for trade entries and exits, which when programmed, can be executed electronically. It is also known as algorithmic trading since computers are used to execute trades. The conditions that are set for these trades are quite simple. For example, they could be based on moving average crossovers.

Automated forex trading systems have been the best pick for novice traders who have little knowledge about trading. They have also been the preference of some experienced traders who would rather avoid the manual trading process.

Automated trading systems are created by highly skilled professionals who have vast experience in trading processes. They are made available in the form of Expert Advisors (EA) and are chosen by their level of accomplishments and knowledge. This is done to win the confidence of traders who use them. A basic requirement of a fully automated trading system is the use of software which is linked to direct access brokers. All rules are written in the proprietary language of the platform. Some popular platforms include:

  • It utilizes the Ninjascript language.
  • TradeStation platform. It utilizes the EasyLanguage programming language.

A common aspect in most trading platforms is a strategy building wizard. They assist the user in strategy building and selection of trades. They have a list of technical indicators which are used to build rules that can be traded automatically. Users can input the type of orders that they want; either a market or limit order. They can also determine when a trade will be triggered.

Most traders though, prefer to program their own custom strategies and indicators. They may even use the input of a programmer. If a trader chooses this path, they will use more effort as compared to using the strategy building wizard of the trading platform. However, it enhances flexibility and can yield favorable results.

When a trader sets the rules, the bulk of work is left to the computer to monitor the market and identify opportunities to buy or sell trades. This is done according to the specifications in the trader’s strategy.

Impact of Automated Trading Systems

A fully automated trading system aid traders to prevent massive losses when trading. This is because as soon as a trade has been entered, the computer will automatically generate stop-loss orders and trailing stops. These orders serve to protect the trader’s investment. Also, profit targets are also generated immediately a trade is entered.

When analyzing the impact of automated trading systems, a lot can be said;

  • They have rendered exchange floors empty since most traders are trading electronically.
  • The speed of making trades has increased tremendously. The trading platforms are quite fast and trades are done instantaneously.
  • They have decreased a number of trades made on an emotional basis. At times, emotions get the better part of humans. Anxiety and panic may engulf them and may cloud judgment especially when making trades. With automated trading software, such emotional trades have been greatly reduced.


When assessing the profitability of using a fully automated trading platform, various facts have to be considered:

  • An automated trading system, just like other systems of trading, does not guarantee 100% profit. If there is one that purports to do so, then it’s probably a scam.
  • They are purely programmed by the rules that individual traders set. At best, they assist traders to benefit from any movement that the market makes regardless of whether it’s positive or negative.
  • Although automated forex trading systems do not guarantee 100% profit, they can contribute to profitable trades. This is because they work articulately. Not even a human broker or investor can match it. They also have a simple interface which traders can work with easily. This enables them to make trades conveniently and efficiently.

Upsides of Automated Trading platform


Automated trading systems allow traders to test a trading strategy with historical market data to ascertain its viability. This ability is known as back-testing, and it enables a trader to see the impact of a trading strategy on their investment before making the actual trade. The rationale behind this is that computers cannot guess.

They act on absolute rules. They execute commands that are pre-set. Thus, back-testing provides a window of opportunity for traders to fine-tune their strategies. They make them know what to expect if they choose certain courses of action. A trader can use back-testing to know the average amount that they are poised to gain or lose at various points of risk.

They Reduce Emotional Trading

As earlier mentioned, humans are susceptible to emotions which can cloud judgment when making trades. A trader may hesitate, pull back or get influenced to trade in an unyielding way. Automated forex trading systems minimize such emotional trades by executing trades instantly after the rules have been set.

Once the computer executes, the action cannot be undone. This capability is beneficial to traders who are afraid to make trading moves. It is also beneficial to those who tend to overtrade.

They Preserve Trading Discipline

Automated trading systems work under set rules, and they execute trades automatically. This in itself brings an aspect of discipline in market trading. It maintains discipline even in volatile markets.

They Increase the Speed of Order Entries

Automated systems are quite swift in generating orders. It takes seconds for one to get in or out of a trade. The response to dynamic market conditions is also swift hence serving to influence positive outcomes for traders.

Trade Diversification

Automated trading systems can be used in diversifying trades. Traders can trade with multiple accounts or multiple strategies at the same time. The result is a diversified trade which has risks that are spread over various instruments.

Humans are unable to execute such diversified trades swiftly. They may take a lot of time doing so. However, computers can identify opportunities across broad markets in just a matter of seconds.

Consistent and Predictable

There is no trading system known to mankind where one can supposedly “plan a trade” and after that “trade the plan”. When the trader follows the prescribed rules, they can determine whether a strategy is profitable. For example, when a strategy wins 3 consecutive trades, the trader is most likely to use it a fourth time.

On the other hand, when a strategy loses 3 consecutive trades, the trader notices this consistency and might discontinue using it.

The Downsides of Automates Trading Systems

They Require Frequent Monitoring

As much as these systems provide a convenience when trading, they require a lot of monitoring. This is because of computer-related issues such as:

  • Computer crashes
  • Power loss
  • Internet and connectivity
  • System malfunctions and downtimes
  • Mechanical failures

All the above issues can negatively affect trades. They can interfere with order placements. This calls for constant monitoring to identify such errors and resolve immediately.


This refers to a scenario where traders use back-testing to create impressive trading plans. However, when these plans are applied in the live market, they perform terribly. The assumption that traders have when over-optimization takes place is that back-tested trading plans could yield 100% profit.

The reality though is that there never exists a perfect trade even when back-testing techniques have been applied.

Mechanical Failures

Although the best automated trading systems are sophisticated, they are not incapable of making mistakes. Discrepancies could be present especially between theoretical trades and real trades. A lost internet connection could also make it impossible to send an order to a market.

Prone to Scams

Many scammers have used automated systems to fleece traders. They promise instant rewards and 100% daily returns to lure gullible traders. Some software could be lowly priced to entice traders to purchase it while others may guarantee high profits. Traders should be on the lookout for scammers.

The Best Automated Trading System

When choosing an expert advisor system, the best ones are those that would replicate your actions if you traded manually; only that they will do it automatically. This gives you more time to develop your trading strategy.

In conclusion, automated trading systems are here to stay and traders should embrace them to enhance their trading experience.