The Benefits Of Automatic Stock Trading

Automated trading systems allow a stock trader to buy and sell stocks automatically based on their prices or other market conditions that are defined specified in a series of rules. The software constantly scans the market and, once the rule conditions are met, executes the trades. The term ‘automated trade manager‘ refers to the software that performs this function and that is linked to a direct access broker (that offers high speed order execution). These systems have become increasingly prevalent with some estimates showing that as many as 75% of shares traded on the US Stock Exchange are executed automatically.

The benefits of such systems are outlined in the sections below.

Use Trading Rules to Define a Strategy

Trading rules are used to set the conditions under which a trade is made. These can be simple, such as defining price entry and exit points, or with complex triggers based on multiple technical indicators. These can include defensive conditions, such as stop losses, to prevent significant losses in the event of market volatility. These rules allow the trader to define a trading strategy in concrete terms.

Remove Emotion from Trading Decisions

Automated systems prevent trades based on emotion, such as fear of loss or hope of greater profits. This helps a trader stick to the trading strategy since, once rule conditions have been met, the trade is made without intervention on the part of the trader. This helps minimise overtrading where a trader buys and sells at every small market movement.

Ability to Test strategies

These systems allow backtesting to be performed on a market strategy. This involves applying the trading rules to historical data of market price movements. This is useful when checking the effectiveness of strategy’s ruleset and to ensure that there are no unintended side effects.

Improve Speed of Trades

Perhaps the greatest benefit of automated trading systems is the speed with which they execute market trades. A few seconds lapse in the timing of a trade can be the difference between a profit or a loss; automated systems, by contrast, execute within milliseconds once rules are met. They also ensure that trades are executed without the possibility of human error during data entry.

An automated trade manager can automatically scan the market for trading opportunities based on multiple strategies. It enables the traded to spread risk over many financial instruments without having to manually keep track of changing market conditions.

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