What is Automated Trading Systems: What It Is, How It Works?

Often, traders use various approaches to make profits. While some focus on precise, high-quality orders, others prefer the speed of executing numerous orders. For those in the latter category, they prefer automated trading and for them, there are various Automated Trading Systems available.

These systems handle executing stock market orders rapidly while aiming for better profits through higher trading volume.

Though it has pros and cons, traders nowadays use these systems to automate their trades with customized strategies.

Curious to know more?

In this blog, let’s understand all about automated trading for beginners, its advantages and challenges, how they work, algorithmic trading strategies, and more.

What are Automated Trading Systems?

Automated trading systems, also known as algorithmic or mechanical trading systems, are like digital assistants for traders. Imagine setting clear rules for when to enter or exit a trade and having a computer automatically carry out those actions. It’s like having a smart helper that follows your instructions precisely.

These systems are so efficient that around 70% to 80% of shares traded on U.S. stock exchanges come from automatic trading. 

Traders and investors can convert their specific trading rules into automated systems with algorithmic trading strategies, making their trades smoother and less emotional.

Moreover, the rules guiding these systems can be as straightforward as a moving average crossover or as complex as advanced strategies requiring in-depth programming knowledge. Some traders design their own rules, while others seek the expertise of skilled programmers.

For this automation magic to happen, traders need software connected to a direct access broker, and the rules must be written in the specific language of that platform. Each platform has its own language.

So, automated trading systems are like having a reliable companion navigating the trading world for you.

Read More: 7 Biggest Stock Market Myths

How Do They Work?

Automated trading systems use algorithmic trading strategies to decide when to enter or exit a trade. Investors can choose from various technical indicators, like moving averages, to create these rules. It’s almost like having a digital wizard to help with trading strategies.

For example

  • If the traders decide to buy 50 shares of a stock when its 50-day moving average (an average of past prices that shows trends) rises above its 200-day moving average. 
  • Then, they’d sell these shares when the 50-day moving average falls below the 200-day one.

They enter these simple instructions, and following these, a computer program will automate the monitoring of the stock price and these moving averages. When the conditions set by the trader are met, the program automatically buys or sells the stock.

This means the trader doesn’t have to constantly watch prices or manually place orders. The automated trading system handles these actions, identifying trading opportunities and executing orders accordingly.

Also, some investors go for more advanced strategies that require a deep understanding of the trading platform and its programming language. They might even work closely with a programmer to design a custom system based on their unique trading approach. 

Some of these algorithmic trading strategies traders can use include – 

  • Trend-Following Strategies
  • Arbitrage Opportunities
  • Mathematical Model-Based Strategies
  • Trading Range (Mean Reversion)
  • Volume-Weighted Average Price (VWAP)
  • Time Weighted Average Price (TWAP)
  • Percentage of Volume (POV)
  • Beyond the Usual Trading Algorithms

While this custom route takes more time and money, it offers flexibility and potentially higher returns.

Building a custom system involves backtesting, where the algorithm is tested against historical market data to see how it would have performed. This helps investors understand its potential performance in the future.

Some experts predict that 90% of trades will happen through automated systems soon. But even with these benefits, there are risks. We need to be careful with artificial intelligence and technology to prevent events like the 2010 Flash Crash from happening again.

Advantages of Automated Systems


  • Reducing Emotions

Automated trading systems make trading less emotional. When emotions are controlled, traders find it easier to follow their plan. With automated systems, trades happen automatically when the rules are met, so traders can’t second-guess or hesitate. This not only helps hesitant traders but also prevents others from trading too much, buying and selling too often.

  • Backtesting

Backtesting is like testing trading strategies using old market data to see if they would have worked. When creating a system for computerized trading, the rules must be very clear, with no room for guessing.

The computer can’t make decisions independently; it needs specific instructions. Traders can use these clear rules to test their strategies on past data before trading with real money. This careful testing helps traders improve their strategies and figure out how much they can expect to win or lose for each amount of risk they take.

  • Improving Order Entry Speed

Automated trading systems use computers to quickly respond to market changes. They can place orders right away when certain trading conditions are met. The timing of entering or exiting a trade by just a few seconds can significantly affect its results.

Once a trade starts, the system automatically generates all necessary orders, like protective stop losses and profit targets. Since markets can change rapidly, seeing a trade hitting its goals or surpassing a stop-loss level before placing orders is frustrating. An automated trading system helps avoid these issues.

Preserving Discipline

One of the hardest things in trading is sticking to a plan. Automated trading makes it easier to stick to a plan when buying and selling stocks. This is important because people often make mistakes when their emotions, like fear or greed, guide their decisions. 

With automated trading, a computer follows the plan exactly, helping to avoid these emotional errors. It also reduces the chance of making simple mistakes, like accidentally entering an order to sell instead of buy.

No trading plan is perfect, and there will be losses sometimes. However, after a few losing trades, some traders may get scared and decide to skip the next trade. If that skipped trade would have been a winner, the trader messes up the plan. Automated trading systems help traders be consistent by sticking to the plan, even when things get tough.

  • Diversifying Trading

Also, these systems let you trade many accounts or strategies at once. This helps to lower the risk by spreading it across different investments and protects against losses. What would be really hard for a person to do quickly, a computer can do in a fraction of a second. 

The computer can quickly look for good trading chances in different markets, make orders, and monitor the trades.

Challenges of Automated Systems

Challenges of Automated Systems

Along with numerous advantages, there are some challenges to the Automated Trading System. Some of them are mentioned below –

  • Mechanical Failures

Automated trading might sound easy – just set up the software, input the rules, and let it trade. But in reality, it’s a complex way of trading, and it’s not foolproof. 

Depending on the trading platform, your trade order might be on your computer, not a server. This means if your internet goes out, your order might not reach the market. 

There could also be a difference between the trades the strategy suggests and what happens in the market. Using automated trading for beginners takes time to learn, so it’s a good idea to start with small trades while you figure things out.

  • Monitoring

It’s a good idea to keep an eye on automated trading systems instead of just turning on the computer and leaving. This is because there might be technical problems like connection issues, power outages, or computer crashes, and the system might act strangely. 

Keeping an eye on it helps catch and fix any issues, like wrong orders or missing orders before they become a big problem.

  • Over-Optimization

Even if you’re not using automated trading systems, traders who test their strategies using historical data can make plans that seem excellent on paper but don’t work well in real markets. 

Over-optimization happens when you tweak a strategy too much to fit past data perfectly, making the plan unreliable in actual trading. 

Some traders think a good plan should always make money and never have losses, so they adjust their strategies to look perfect in historical tests. But when they use these plans in real markets, they often fail.

Basics Of Automated Trading for Beginners

Basics Of Automated Trading for Beginners
  • Understand the Market – Before entering automated trading systems with algorithmic trading strategies, understand the market dynamics. Use a stock trading app to learn about the instruments or markets available for trading. This understanding helps you create a hypothesis for your trades.
  • Learn to Code – Coding is a crucial skill to create algorithmic trading strategies. Learn coding languages like Python to create your algorithm, or seek help from experts to code it for you.
  • Back-test Your Strategy – Before deploying your algorithm in live markets, test it thoroughly. Use reliable historical data to check if your strategy works. Third-party back-testing software can help validate your algorithms.
  • Choose the Right Platform – Your choice of broker and platform is crucial. Select a broker that supports your algorithm and offers tools for optimizing your trading strategy.
  • Go Live – When confident in your algorithm’s performance during testing, take it live. Monitor its functioning in real-market conditions and be prepared to make adjustments if needed.
  • Keep Evolving – Failure of your first strategy doesn’t mean you should give up on algo trading. Keep experimenting with codes and refining your approach based on what works best.

Technical Requirements for Automated Trading Systems

  • You need to know how to program to create a trading strategy. Alternatively, you can use ready-made trading software.
  • Make sure your computer is connected to the internet and has access to trading websites to buy or sell stocks.
  • Get access to live market information that the computer program will use to find good times to make trades.
  • Test the trading system you built on historical data before using it in the real stock market.
  • Have past market data ready for testing, depending on how complicated the rules are in your trading program.

The Bottom Line

Although automated trading systems appeal for various reasons, they should not be considered a substitute for manually executed trading.

Technology failures can happen, and as such, these systems do require monitoring.

Server-based platforms may provide a solution for traders wishing to minimize the risks of mechanical failures.

Remember, you should have some trading experience and knowledge before using automated trading systems. 

And if you are looking for some of the best trading courses to get into trading, make sure that you check out Upmarket academy’s trading courses. You can learn and improve your trading skills with their live sessions, interactive videos, FREE courses, and much more.

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