Automated tradingNovember 17, 2021
Exchange trading is quite a complicated process being full of various subtle aspects. It is not so easy for the beginners to understand them and respond to the trend movements in the market before it’s too late. That’s why trading robots should be developed to make trading available not only for skilled traders. These trading robots allow a user to automate the process. In this article we are going to understand what exactly they provide and how they work.
Table of Contents
Concept of algorithmic trading and purpose of trading robots
Algorithmic trading is trading in accordance with the market signals which were generated beforehand by automated software programs which are known as trading robots. They allow automating a trading process on the stock exchange. They are developed to make deals without the direct participation of a trader. The trader is expected to set the parameters following his trading strategy. On the basis of the developed algorithms, the system will analyze the market on its own, place and close the orders, and take other actions in the trader’s state. At that, a trader can automate a stock trading completely as well as he can reserve the right to make the final decision. The system makes an analysis of the market, chooses the best variant of a trade and sends a message to a trader with its recommendations. The trader can either agree with the deal or decline it. Such partially automated trading robots are also known as trading advisers.
Types of trading robots
Offering of trading robots increases with the popularity of automated trading. The developers of algorithmic software develop models meeting a current demand and various goals of a trader. Going further, we’ll consider the key types of trading robots:
- Automated and partially automated. As we have already mentioned, any software programs intended for automation of trading can be divided into two groups. The former is a completely automated software which does not require a traders’ participation in trading. The key function of a trader is to set particular parameters and make adjustments to the strategy from time to time, in the event that there is no profit. The latter is a partially automated trading adviser intended to analyze the market and send recommendations to a trader as to a purchase or sale of assets.
- Low-frequency, mid-frequency, and high-frequency trading robots. Here we are speaking about a number of deals which can be open with the help of a certain trading robot. Thus, when you use a low-frequency one, you can open under 10 deals a month. When you use mid-frequency robots, the number of deals increases up to several dozens of deals daily. And when you use the high-frequency robots, you’ll be able to open up to several tens of thousands deals during a day. And the more deals the software is able to open, the more expensive is its maintenance.
- Scalping robots. According to the title, these trading robots are used for scalping when a trader opens a large number of short positions. As a consequence, scalping robots are high-frequency ones being able to open a lot of deals. Every day a trader can execute up to several thousands or even tens of thousands trades.
- Multicurrency. This type of trading robots is used in financial markets. Among other functions they can track dynamics of financial markets currency pairs and risk hedging. For instance, they open multidirectional positions of the same volume for the same currency pair. Multicurrency robots are quite expensive and customization of their algorithms is rather complicated.
- Arbitrage. These ones help to gain from differences in prices of various brokers. It is quite difficult to monitor the market looking for the price gaps tracking a lot of providers without special software, that is why usage of arbitrage robots facilitates the task very much. However, it is important to remember that, as a rule, brokers do not encourage arbitrage on the stock exchange, which is considered a questionable strategy.
- News trading robots. Their algorithms are based on fundamental analysis of the market. They forecast trends of the market following on from the key economic performances including a supply-and-demand balance, key interest rate, unemployment, inflation, and others.
Pros and cons of automated trading
The list of advantages of automated trading includes:
- No human factors. The key enemy of a trader is emotional instability. Acting out of emotions a lot of traders, in particular beginners, can open deals without thorough reasoning. For instance, it is very common when a trader starts to sell or buy the assets at the slightest exchange fluctuation. In most cases such deals are untenable and incur losses. Trading robots make decision not because of emotions but in accordance with algorithms that is why the hot-brained deals are impossible in automated trading.
- Close adherence to the algorithms. The trader can get tired and make mistakes in his calculations, while trading robots are free from such shortcomings and will follow the set algorithms in any case.
- Load relief for a trader. Trading is quite a time taking activity. Even if a trader uses partially automated software, most of the work is performed by robots. The trader does not have to analyze large amounts of information, look for more profitable positions, and so on. Besides, trading robots are able to trade within 24 hours that is why it does not miss any profitable deal.
- Analysis of large data volumes. There are tons of factors impacting the market dynamics. It is not easy for a human to consider all of them. Trading robots are able to analyze a huge amount of information at short notice. Moreover, the system is able to analyze a lot of performances all at the same time, improving technical analysis.
- Parallel trading with different tools. Trading robots are able to open the deals with several tools at a time. It is complicated to perform a parallel analysis of several types of assets manually. Such an approach can cause confusion.
Regardless of large amount of benefits of an automated trading, there are some cons that is why, before you start using trading robots, you should pay your attention to the following points:
- Trading robots nearly do not have regard to the news which can influence the market dynamics significantly. Even if the algorithm includes fundamental performances, the software does not always work with them in the right manner.
- It is quite difficult to adjust trading robots to the particular goals. In order to make automatic trading efficient, it is vital to take effort and develop the robots in a proper way. The mistakes in the algorithms can become a reason for heavy losses. At that, you should not make mistakes both when you build your strategy and when you develop a program code. Speaking of, if a trader cannot boast of at least basic programming skills, he will hardly be able to program trading robots by himself. Of course, there are constructors of trading robots, but they cannot be customized.
- Need for reconfiguration. Some people think that it is enough to set the software initially. But any strategy should be changed from time to time. If the trading robots will always trade in accordance with initially developed algorithms, they become unprofitable at some point. If a trader programs his automated advisor by himself, he’ll be able to update it easily. But if he has no required skills, he will have to engage specialists and bear additional expenses.
Where can you take trading robots?
You can get trading robots in two ways:
- To buy directly from developers (Algo Signals, Fury, and others). On one hand, such a purchase from a developer is the most reliable way. On the other hand, you’ll have to customize the algorithms by yourself.
- To use trading robots developed by brokers (Infinox Capital) or provided by marketplaces (Dutch Rate). As a rule, automated trading is one of the options of a broker and part of its standard service package. Trading robots can be integrated into trading terminals, access to which is provided by a broker. Moreover, specialists can render assistance with customization.
Also, there are special software products for development and programming of trading robots, but you hardly should even consider them without programming skills.