Questions To Ask Before Investing In Automated Trading Systems

automated trading systems algorithmic stock trades

An automated trading system, also known as algorithmic trading, is in use for over a decade now, though it has become quite popular of late. You may have watched videos or guides available freely online. However, you are bound to have several unanswered questions and may find it challenging to start trading before understanding its basics. 

Here are some commonly asked questions and the answers to them: 

What Is An Automated Trading System? 

This is the first question that pops up in your mind when you consider venturing into this field. In a nutshell, automated trading is a system where all trading activities work with minimum human intervention. The system takes decisions based on algorithms fed into it. This algorithm is a step-by-step process where you can execute the orders with minimal market influence, which helps reduce the market impact of a trade by splitting it into smaller orders. 

The system works on a set of parameters with a limited range. Although the parameters go on a preset trading methodology, they are based on precise mathematical computations with various degrees of complexity. However, it is impossible to use an automated trading system without the support of stock trading software. 

Why Should You Invest In This System? 

There are advantages in algorithmic trading because it is a fully automated system with no chances for human error to creep in. Besides this, there is the additional benefit of consistency in trading. It is a significant advantage, given the volatility that plagues the market. A session that shows the market rising can experience a sudden drop for no reason at all. 

Managing Inconsistencies 

Such inconsistencies can be handled efficiently by an automated system. A computerized system is devoid of human emotions, and orders are placed and executed as per trade signals. As the money management principles are already there in the system, it calculates the profit and loss based on that system, ruling out unexpected losses. 

Precision Trading 

Intricate parameters govern an automated trading system, and all trades are executed automatically. All entry and stop orders are executed by default, ruling out any emotions related to human-based trading. The system is designed such that the precision remains constant despite an increase in the volume of trades, with profit being the only target. There are no trades executed with errors; hence the chances of incurring loss are zero. 

What Is Meant By Latency In This System? 

Latency indicates the time lost in between sending out an order and the same being received for execution. There could be delays in routing the order or in processing market data. Calculating the latency helps you decide which strategy to adopt: whether a market making strategy or a momentum-based strategy is best at that time is determined by the system. 

What Is Low-Frequency Trading?

Low-frequency trading is when the system accommodates latency ranging from 0.5 seconds to 1 second without affecting the performance and outcome. However, chances for deterioration in performance cannot be ruled out. 

What Is Medium Frequency Trading? 

Medium frequency trading is when the system won't tolerate more than a few milliseconds of latency. Medium frequency trading is safer when compared to low-frequency trading. 

What Is High-Frequency Trading? 

High-frequency trading is when the system is susceptible and will not tolerate even a microsecond's disadvantage. That is why high-frequency trading tends to beat manual trading under any circumstance. It is more so during day trading when traders try to benefit from arbitrage opportunities (marginal difference in rates between various exchanges). The automated system functions faster and more efficiently to execute orders, which is impossible with physical trading. 

Summing Up Automated Trading Systems 

An automated trading system's advantage is that a trader can handle many trades simultaneously with minimum effort. It is possible to deal in multiple stocks deploying different strategies simultaneously, ruling out even an iota of loss. When it comes to smart investing, algorithms and automation are your friend, when used correctly.

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