People frequently picture traders analyzing vast amounts of data and making fast choices with millions on the line when they think of financial trading. Although estimates indicate that up to 70% of US equity trading is automated, the truth is that the majority of trading is now carried out by algorithms. A sophisticated computerized system whose only goal is to make money has replaced the period of the stockbroker.
Table of Contents:
- Understanding Mechanical Trading Systems
- Forex Trading Strategies that are Automated
- Mechanical Systems for Trading Stocks
- Top-Rated Automated Trading Software
Understanding Mechanical Trading Systems
Automated trading systems, also referred to as mechanical trading systems, are computer programs that carry out trades in accordance with predetermined protocols when specific market conditions are fulfilled. These systems can be created by traders to automate trading and carry out trades in accordance with their tastes. The protocols, which are based on different indicators, strategies, or techniques created specifically for a given security, can be as simple or complicated as the trader desires.
Traders typically need software connected to a direct access broker, which specializes in quick order execution and allows traders to transact directly with the exchange, in order to use these systems. These systems’ elimination of emotions, which frequently result in bad decisions, is one of their key benefits over manual trading. Automated systems can address the issue of human psychology clouding judgment, especially when it comes to panic, dread, and greed.
Automated systems also provide quicker order execution, which over time can result in increased revenue and reduced losses. Like all technologies, these systems have drawbacks and are sometimes plagued by glitches or communication problems. To ensure the software functions properly, traders must keep an eye on it.
Despite their benefits, automated trading systems are not a “set it and forget it” solution; in order to succeed, traders must stay attentive and involved.
Forex Trading Strategies that are Automated
Many traders already use mechanical forex trading software, which is becoming more and more common as automated trading technology advances. This article concentrates on a trend-following method using a specific Forex trading strategy.
A long trade is opened if the open price on the currency pair is higher than the open price X days ago, and a short trade is started if the open price is lower than the open price X days ago. The strategy uses two signals and six rules. The guidelines state that if no trades are open and a signal appears, a trade should be entered. A stop-loss order should be placed X% of the ATR-20 away from the entry price, and new trades should have their lot sizes changed so that the loss at the touch of the stop-loss is 1%.
Only one-directional trades are permitted at any time, and the strategy constantly updates the stop-loss on trades so that it functions as a trailing stop-loss without the need for extra parameters. The strict rules of the strategy make it durable enough to function successfully over time with little adjustment.
Automated trading will become more common as Forex software develops, and traders can use these tactics to streamline their trading and boost revenue.
Mechanical Systems for Trading Stocks
Mechanical trading systems are adaptable and can be used with many different types of commodities, such as stocks, foreign exchange, and cryptocurrencies. Because they do away with emotional reactions, which are the main reason for losses in the financial markets, these systems are attractive to traders.
To put into practice a mechanical trading system for stocks, you must first choose the indicators that will guide your system’s decision-making and the period in which you want to trade. A common indicator is the moving average, and you should use at least two indicators to create a trustworthy strategy. Moving averages can also be used in combination with other indicators like RSI or MACD.
You must decide on your level of risk tolerance before choosing your timeframes and indicators, and then set your stop-loss and take-profit orders appropriately. Generally speaking, your take-profit target should be double the amount of risk you assume, and your stop-loss order should be no more than 5% of your entire position.
Finally, based on rules established by your indicators and stop-loss/take-profit orders, you must choose your entry and exit locations. You can establish these points using a variety of methodologies and theories, but you should modify them to fit your unique indicators and trading approach.
Based on specific indicators and their signals, such as the 5-day and 10-day moving averages and stochastic lines, the entry and exit marks for a buy or sell position are chosen. You should modify these guidelines to suit your unique requirements since they are merely illustrations. By following these steps, you can develop a trustworthy mechanical stock trading system that will enable you to execute deals profitably while limiting losses.
Top-Rated Automated Trading Software
There are various providers of automated trading software, but you should consider five crucial factors when selecting one:
- Preferred markets – Ensure that the software can trade in the markets you want to access.
- Reduced latency – The software should reduce latency to provide access to the market similar to a floor trader.
- Well-designed interface – The interface should be functional and configurable to your preferences.
- Industry-standard programming language – Sophisticated strategies may require programming, so the software should support industry-standard programming languages.
- Detailed price histories for backtesting – The software should have access to detailed backtesting across multiple timeframes.
MetaTrader 4 is a popular Forex trading platform that offers the best overall service based on these criteria. It can integrate into almost any brokerage account without requiring you to open new accounts. However, if you want to trade other assets using automated trading software, Interactive Brokers is another option to consider.
Even though some trading systems can be extremely complex, it’s essential to keep in mind that they are not perfect. These systems will ultimately fail because they are subject to the law of entropy, just like any mechanical creation.
To ensure that the software continues to perform at the desired level, it is essential to continuously watch it and make changes over time. Even the best mechanical design or creation won’t last indefinitely, so it’s important to stay on guard and be ready to make adjustments when the system doesn’t work as anticipated.