What Is An Automated Trading System
By Don Wright
In simplistic terms, an automated or mechanical trading system is a set of specific rules which when applied to the markets, signal entry and exit points automatically. The rules can consist of instructions with regard to the position of say moving averages, oscillators, or some other technical indicator, or maybe specific price patterns, or a markets proximity to certain key price levels, Etc. Most often several of the above are combines in order to create a full set of rules. As a simple example, if a 20 period moving average crosses over a 50 period moving average and the stochastic indicator is less than 20, then buy.
Once your list of rules are coded into a full system, you instruct your trading platform to trade the system on an automated basis. The system will from this point on, automatically place all of the buy / sell orders into the markets.
Automated trading systems take all of the guesswork, personal interpretation, gut feeling, instinct and emotions out of trading, thus eliminating many of the knee jerk reactions traders might find themselves making due to the fear and greed emotions that are part and parcel of non automated trading. Most Systems fall into one of three categories, either they are designed to trade with the trend, against the trend, or on a breakout.
Trend Following means that if the market is moving strongly in a particular direction, then you look for a good place to enter, in the direction of the current strong movement. Counter Trend or Fading means that if the market is moving in a particular direction, then you look for a good place to enter, as you predict that the strong move is about to end, i.e. the market could be overbought or approaching strong resistance. Breakout trades look for prices to move out beyond a certain range, i.e. if the market trades above the highest high of the last 20 bars, then buy. Or positions are taken if prices are breaking out of a particular chart formation, like a triangle for instance.
They can be designed to day trade, say on 1, 3, 5 or 15 minute charts, swing trade on say 60 minute or daily based charts, or trade long term on say daily or weekly based charts.
Day Trading is where traders look to make quick profits from the small market moves that occur during the day. They never hold positions overnight. Swing or Short Term Trading
is where traders take a position in the market and look to hold this position for several days in order to make a profit from short term market movements. Long Term Trading is where traders take a position in the market and look to hold it for weeks, months or maybe even years.
Other aspects that are included in the development of a trading system should be risk management, i.e. using a stop loss, trade management, i.e. using a profit target or trailing stop and money management, i.e. how many contracts to trade in relation to the account size.
A person who wishes to trade the markets with an automated trading system has 3 choices, either develop a trading system themselves, have an expert code the system for them, or purchase an existing trading system. Developing a profitable trading system yourself is by no means an easy task. It requires a great deal of understanding with regard to the indicators, the various parameters and how they all interact with each other.
A second option is to write out your desired trading rules and then have a professional code those rules into a fully automated trading system. This can be a very expensive exercise. One way to reduce the costs of this is to use a specialist broker, such as http://www.thetradingsystemsbroker.com, who have a panel of trading system coding experts. They will send out your requirements and then inform you as to the lowest quote for the coding to be completed.
The third option is to purchase a trading system, however, with every system developer out there claiming that their system is most definitely the greatest system available, how do you filter through all of the hype, promises, clever marketing and sometimes downright misleading information in order to find genuine, proven, profitable trading systems that are right for you. Fortunately there is a company that can solve this dilema for you. Which Trading System specialises in fully impartial testing, monitoring, and publishing performance ranking tables for hundreds of futures, stock, options and trading systems. Not only this, but they also publish detailed individual system performance reports for every trading system in their database. You can access a free detailed individual system performance report for the best performing trading system in their database by visiting their website.
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