Automated systems enable the use of a wide variety of trading techniques. A lot of traders use a combination of a few indicators, as well as other forms of technical and/or fundamental analysis. Different kinds of chart patterns, price and volume, and other criteria can be set up to fuel the opening and closing of positions. Also, detailed and intricate strategies can be defined based on the criteria.
Then, it is programmed to be deployed automatically when specific conditions align.
Aside from that, traders must stay alert when deploying these systems. Technical indicators might not be valid if `fundamental conditions unexpectedly change. In the event that it may warrant avoiding trading in a particular market, automated traders would still be processed without human intervention.
Some possible automatic execution settings have:
- Limit order – a buy or sell transaction at a given limit price or better
- Stop loss order – made to limit an investor’s loss on a security position and work with short and long positions or holdings.
- Fibonacci ratios have retracements, arcs, and fans that traders might use in seeking confirmation of other technical analysis.
- Stochastic oscillators – momentum indicators that compare the finishing price to the range of prices over time.
Moreover, automating a strategy is hard work. Profitable automated trading requires not just a sound strategy, but that strategy needs to be exchangeable into programming code or commands that a computer can interpret. Also, they can’t base the rules on subjectivity, and a lot of trading strategies are subjective. People only use this in certain conditions. Unless the conditions are explicitly defined in the programming code, the strategy will not trade in the planned way.
Here are some of the possible things to consider when setting up automated executions:
- Risk Caps – may include stop loss orders on every trade. For instance, they placed a stop loss a fixed dollar or pip amount away from the entry point 0r a specific percentage away.
- Entry Criteria – this is precisely what conditions require to be present to initiate a long trade or short trade. A simple example of this is when a short-term moving average (MA) crosses over a long-term MA.
- Profit Taking – as stop loss controls downside risk, profits need to be taken. Define how trade will exit if the stop loss is not reached. This might be a fixed dollar or pip amount, a percentage, or a defined reward:risk based on the risk. Let’s say if the risk of the trade is 5%, take profit at 15% (3:1 reward:risk)
- Constraints on Conditions – define if the program will trade and when it won’t. For instance, if it can stock strategy trade in the pre- or -post-market or only during regular hours. Also, if it can place trades right ahead of major news events. Decide, then define the constraints.
In these basic considerations, there are infinite ways as to how they are programmed. And this lets for great flexibility when it comes to automated trading. Simultaneously, the more complex a system, the more difficult it is to determine what part of it is not working when things go wrong.