Automated stock trading explained - How does it work?

29/06/2021

An automated trading system represents trading via a computer system using the algorithms. This gives traders an opportunity to set their rules for opening and closing the trades which will be programmed into the computer and after that, the system will automatically continue generating trades for the investors. A great example of automated stock trading systems is High-frequency trading, known as HFT which is a method that uses complex algorithms in order to analyze several markets and carry out the orders according to the market situations at a very fast pace.

Automated trading allows people to set their own entry and exit as well as the fund and risk management rules that will be programmed into the computers and it will control the further trading processes. So the trader will no longer have to waste the energy or time. Besides, it minimizes the chance of emotional trading, sets a specific discipline, increases the trading speed (due to the computer taking literal milliseconds to make decisions on potential trades). 

However, like with every other trading option, this type of trading also has its own disadvantages such as computer-related failures, and crashes. Besides, sometimes it might not be very beneficial for the trader. In this guide, we will further analyze the other major characteristics of automated stock trading accounts. 
 

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How does the Automated Stock trading system work?



The Automated Stock trading system allows traders to set their trading rules such as entry and exit limits and money management criteria. After the investor chooses the best possible appropriate trading options, those rules will be programmed into the computer. This means that future trades will be made automatically by the algorithm system and the latter will be responsible for every other action that will occur in the trading process.

While talking about trade stocks automatically, it is important to know that the market entry and exit points can be different according to the level of traders’ market knowledge and experience. Consequently, the characteristics of the strategies implemented into the computer system can be simple as well as complex.

For algorithmic trading, a computer program would be designed to sell and buy according to the fixed conditions by the investor, so that the trader would no longer have to constantly monitor the data. These are the basics that make up algorithmic trading. With the help of computers, people can make sure their trades are executed at the right time, the order amounts are perfectly accurate and traders can simultaneously check multiple indicators and they can reduce the amount of risk of manual errors.

A lot of investors want their desired indicators and strategies to be programmed into the automated stock trading system. Sometimes they even work with the software developers to be sure that their future tradings will be programmed precisely as they wished. This might be a little puzzling process however, in most cases, the overall results after that are much greater and effective.

When the trader finally makes a decision, the automated stock trading software will control the existing buying and selling options in the market. When the trade has been completed the orders such as stop loss and trailing stops will be automatically activated by the computer.


 

The main strengths and weaknesses of Automated Stock trading

As with every other trading option, Automated stock trading also has its own pros and cons that need to be taken into consideration while choosing the latter. In this paragraph, we will discuss each of them in a detailed way.
 

Advantages

Reduction of Emotional Trading

One of the biggest advantages of using the automated stock trading app is that it reduces emotional trading which is a very important factor and affects a great deal on the trades’ overall results. When the trade criteria are set and programmed into the computer system, the trader will no longer have to worry about how the trade will go and what steps should be taken in order to reach success. The algorithms will be responsible for all of these which means that traders will not waste their energy as well as emotions.
We all know that sometimes emotions can be a very big obstacle in the trading process. Especially for the beginner traders who do not have enough experience yet to be fully confident in their strategies. So using the automated stock trading account might be the best possible option for them.
 

Setting a trading discipline





Another noticeable perk of this type of trading is that it sets a trading discipline even in a very fast-changing market. When the specific criteria are being established by the trader, nothing can affect them no matter how volatile the market can become.
 

Increase in execution speed

Besides, another big advantage of automatic trading is that it increases the overall trading speed. The major reason for this is that when some kind of change occurs in the stock market, the computer systems have a quick response and they automatically make appropriate decisions. We all know that even milliseconds can have a huge impact on the final results and it can have a crucial effect on the overall income that the investor generates. Besides, trade stocks automatically will help traders avoid extra losses in the trading process.
 

Disadvantage

Failures in the internet access

This type of stock trading has its own disadvantages that also need to be considered. For example, internet access might be lost at some moment that might end up failing the current order. Besides, there might be several trading strategies that can be very difficult to be activated through the algorithm system. So if a person has a complex strategy it will be very hard to code it into the computer. So trading them with automated stock trading might become a very hard process or else, they will have to carry on trading manually.
 

System failures

Moreover, another thing that should be noted is that there is always a chance of computer crashes or other unpredictable system failures, this is why people should always have an eye for the traders even though the auto stock trading apps automatically manage every single detail in every trading.
 

Less profitable option

Besides, as we have already mentioned, another disadvantage is that sometimes it might not be as beneficial for the trader as manual trading. The main reason for this is that usually, the computer chooses the least risky option in all kinds of trading alternatives. This means that there is a very low chance that the trader will manage to double the invested capital. So if someone wants to generate a substantial amount of payouts trading manually might be the best option because the stock trading automated system may not be very helpful in terms of the large incomes.


 

A real example of Automated stock trading

As we have already mentioned earlier, the real example of automated stock trading is High-frequency trading, known as HFT which is a method that uses complex algorithms in order to analyze several markets and implement the orders due to the market conditions at a very fast pace. This type of trading is very beneficial because it has a very fast execution time.

The most important benefit of this automatic share trading example is that it increases the level of liquidity in the market and gets rid of the small bid-ask spreads.

On the other hand, people sometimes criticize High-frequency trading by saying that it eliminates the role of humans in the decision-making process while trading. Besides, while computers make trading decisions very quickly, their fast response to market changes might cause a large market movement.

It is also important to note that trade stocks automatically can be done on a small scale but most algorithmic trading is done in a manner called high-frequency trading or HFT. This means that the algorithm places the high number of trades in rapid succession making a little bit of money on each trade that then ends up to a large amount. This trading technique becomes popular when stock exchanges around the world offer incentives to companies making the stock more liquid or easier to sell.

The New York Stock Exchange for example has a group of companies that add competition in liquidity to stock quotes in the market. The NYSE then pays a fee for providing more liquid stock which in turn helps the stock exchange broker with deals.  This high liquidity is also what allows HFT to happen and it can be very profitable.

 

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Stock trading automation - Key Takeaways

As we have already explained, trade stocks automatically mean trading via a computer system using algorithms. That way people are allowed to set their own entry and exit points, as well as the fund and risk management rules that will be programmed into the computer systems. After that, the computer will monitor the further trading processes independently.
 
However, the characteristics of the strategies implemented into the system can be simple as well as complex.
 
Automated stock trading software has its own pros and cons. The major benefit of this type of trading is that it reduces emotional trading and the investors do not have to waste their energy or time. On top of that, after setting the specific rules, nothing can affect them no matter how volatile the market can become.
 
Despite all of this, automated trading has several disadvantages as well including computer crashes or other failures related to the software system that might have a negative effect on the overall results.
 

FAQ on Automated stock trading

Does automated stock trading work?

Yes, it does. As we have already explained, automatic share trading enables traders to reduce emotional trading which is a very important factor and has a huge impact on the trades’ overall results. When the trade criteria are established and programmed into the computer system, the investor will no longer have to worry about how the trade will go and what steps should be taken in order to reach success. Besides, it sets a trading discipline that allows people to make more stable and consistent trades with reasonable payouts.
 

Is automated share trading illegal?

No, in most cases, automated trading is legal. There are no restrictions that can prevent retail traders from trading using algorithms and computer systems. In the US and the western world, algorithmic trading is mostly accepted. However, the overall legitimacy of the automated trading system is still in question.
 

What is the best-automated stock trading platform?

There are different types of automated trading platforms available in the market. Some of them are indeed the most popular among millions of users. Such kinds of trading platforms include MetaTrader 5, which provides very essential options. Traders can enjoy the advantages of automated trading, even if they do not have any knowledge of programming.
 

Are automated shares trading profitable?

In most cases, automated trading does have large payouts. The main reason for this is that generally, the computer selects the least risky alternative in all kinds of trading options. This means that there is a very low chance that the Investor will manage to double the invested capital.

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