Automating trading can help you overcome some common challenges many traders face. For instance, have you ever missed a trading opportunity because you weren’t watching the markets? Or have you ever entered a trade only to close it early because you were anxious about a short-term move? Automated trading can help you avoid these pitfalls by using algorithms to execute predefined trading strategies automatically. In this article, we’ll look at how to automate trading and offer valuable insights to help you get started with low latency trading. You’ll learn to implement trading strategies to enhance profitability, efficiency, and market consistency.
One of the best ways to get started with automated trading is to use a trading VPS. A trading VPS from QuantVPS will give you the tools to implement automated trading strategies and optimize your trading performance.
What is Automated Trading & How Does It Work?
Automated trading, or algorithmic trading, involves computer programs and algorithms to execute trades in financial markets. These programs are designed to:
- Analyse market data automatically
- Identify trading opportunities
- Execute trades without human intervention
The rapid advancement of technology means that computers now dominate trading on financial markets. Although it is difficult to get an exact figure, it is estimated that around three-quarters of all trades on US stock markets are carried out by machines using pre-fed instructions.
The Rise of Automated Trading
Automated trading is prevalent in the United States, although bots proliferate worldwide. One report suggests that the computerized system trading market will expand at a compound annual growth rate of 13.6% between 2021 and 2030. By the end of the decade, it is predicted to have an estimated value of $31.3 billion.
Automated trading strategies can be used across various asset classes, including:
- Forex
- Stocks
- Cryptocurrencies
- Futures
- Options
How Automated Trading Works and How to Start Using It
With automated trading, you can predict whether the price of a particular market will rise or fall using a type of trade called CFDs—Contract for Difference. CFD trading is a form of derivative trading in which investors speculate on the price movements of underlying assets without owning them.
Also, automated trading allows you to replicate the trades of experienced traders. This allows you to automate your trading and participate in the market, even if you’re new to trading.
To get started, you’ll have to choose a platform that supports automated trading and set the parameters for your trading strategy.
Now, here’s where it gets interesting.
Creating Your Trading Strategy
Based on your trading experience and knowledge, you’ll create a set of rules and conditions (parameters) that your custom algorithm will follow when making trades on your behalf. For example, set parameters for the timing of the trade, the desired opening and closing prices, and the quantity you want to trade.
Trend-Following Strategy: A Practical Example
One example of automated trading based on timing, price, and quantity is a trend-following strategy. The algorithm could be programmed to buy a specified amount of, let’s say, Microsoft shares when its 50-day moving average crosses above the 200-day moving average, indicating a potential upward trend.
Automated Execution: A Hands-Off Approach
Once your parameters are set, the automated trading strategy will constantly monitor the prices in the financial market. If the predetermined conditions are met, the algorithm will execute trades automatically on your behalf. This allows you to take advantage of specific market events and gain more efficiency.
Leveraged Trading: High Risk, High Reward
It’s crucial to understand that automated trading involves leveraged trades using CFDs. You only need to deposit a small margin to gain exposure to a more prominent position. Nevertheless, profits and losses are calculated based on the position’s full size, not just your margin amount. This means losses could exceed your initial deposit if the market moves against you.
While automated trading can be a convenient and efficient way to participate in the markets, it’s essential to understand the risks involved and manage them effectively.
The Pros and Cons of Using Automated Trading Systems
Pros
Trading Speed
Rapidity of thought and execution means that bots can better exploit trading opportunities as they arise than humans can. This benefit can be particularly acute for traders using short-term strategies like scalping and day trading.
Time Benefits
While trading activity should constantly be monitored for technical problems, using bots frees up time that can be used for other investing-related activities, like analysis or setting up further trades.
Emotion is Removed
Individuals often place trades based on rash decision-making, which leads to large losses. Employing a machine that only acts on strict, pre-determined rules eliminates this danger.
Backtesting Benefits
Most automated systems allow traders to test their rules and strategies against historical data. This enables them to evaluate their performance and make necessary adjustments before implementing them in the real world.
Improved Diversification
Bots are excellent at trading and managing multiple strategies, assets, or markets simultaneously. This provides diversification and thus reduces an investor’s risk exposure.
Strong Risk Management
Automated trading systems provide a safety net by alerting traders when specific conditions are met or when it is time to act. They also allow traders to use tools like stop-loss and take-profit orders to limit potential losses.
Cons
Over-Optimization
Also known as ‘curve fitting,’ this refers to a backtesting situation where users excessively tailor their trading strategies to perform well based on historical data. Such fine-tuning means a plan may not perform strongly in live trading as it fails to adapt well to real-world conditions.
Technical Complexity
Setting up and managing a customized, auto-based trading system can require technical skills in:
- Programming
- Data handling
- Backtesting
- Security
This can take a lot of time and effort.
Mistakes Can Be Costly
Errors at the testing and configuration stages can ruin a trading strategy. In August 2012, a faulty algorithm by trading firm Knight Frank resulted in millions of unintended trades in less than an hour, costing the company a staggering $440 million.
Stability Issues
Automated trading systems only work when the technology underpinning them is running smoothly. Software bugs, hardware problems, and connectivity issues are all common problems that can scupper an individual’s investing plans.
Related Reading
- How to Automate Trading
- Introduction to Algorithmic Trading
- Trading Risk Management
- How to Set Up Algorithmic Trading
How to Automate Trading for Maximum Profits
The first step in an individual’s investing journey remains the same, even when using bot-based trading. They must:
- Decide which financial markets to trade in (e.g., forex, stocks, commodities).
- You can select financial instruments, such as futures, options, shares, or contracts for difference (CFDs).
- Develop a trading strategy tailored to their investing goals and personality traits, including risk tolerance.
Learning the Ropes: Resources for Beginners
There is a wealth of information and resources to help novice investors get started, from books, webinars, and online courses to Quantopian.com, a website for researching historical stock price data and writing trading algorithms that can be backtested on that data. Only when they’ve mastered this stage should they take the next step and ask whether machine learning is the best option.
Machine Learning vs. Algorithmic Trading
Again, this will require in-depth reading to learn the ins and outs and the pros and cons of machine-assisted dealing. If an individual decides to use a scalping trading strategy, which involves executing a large volume of trades over a very short period, using an automated trading system has obvious advantages.
Nevertheless, if concerned about ceding control, this person may still prefer to stick to conventional trading methods. These are just a few essential things to consider.
Choosing the Right Platform for Automated Trading Success
An investor has decided to take the plunge and try automated trading. The next thing to do is to choose a trading platform that supports automated-based dealing. Some of the most popular ready-made computerized trading systems available today include:
- MetaTrader 4
- MetaTrader 5
- cTrader
- Wyden (formerly AlgoTrader)
It’s important to note that mechanical trading platforms are not universally compatible with all brokerages. These automated systems rely on Application Programming Interfaces (APIs) to connect and execute trades through financial intermediaries.
Mechanical trading platforms are not universally compatible with all brokerages. Automated systems use protocols called Application Programming Interfaces (APIs) to connect and trade via a financial intermediary.
Compatibility and Platform Limitations
A trader with a particular broker in mind may want to check that their technology is compatible with the platform they are considering using and vice versa. Some automated platforms are also only designed for certain asset classes. Wyden, for instance, only facilitates the trading of cryptocurrencies like:
- Bitcoin
- Other digital assets
Brokerage Platforms and Fees
Some brokerages allow traders to download an automated platform once they sign up. This option often incurs fees that the company will directly charge the user. Critical criteria a trader needs to consider when choosing which trading platform and broker to use remain the same regardless of whether they choose the automated trading route.
Key Considerations for Platform Selection
It is essential to consider trading fees and subscription costs to ensure their chosen brokerage is appropriately regulated. It is also important to consider how easy the platform is, whether or not it offers advanced tools and features (such as artificial intelligence), and whether it allows you to trade on the go using a mobile app.
Start Simple, Then Get Complex with Automated Trading
Automated trading has varying degrees of complexity. Some platforms come packed with pre-built algorithms or trading strategies that can be easily set up and used without excessive customization.
Traders will select from a list of widely used technical indicators and input other key data like entry and exit conditions and position sizes. Using these previously engineered algorithms means traders don’t have to spend time learning how to program.
Simplified Approach
Another popular option is copy trading, the simplest automated method. It involves copying another investor’s trading decisions and strategies (commonly known as the ‘master investor’ or ‘signal provider’). All the user has to do is select which investor they wish to replicate and then sit back.
Get Ready to Launch Your Automated Trading Strategy
Once a trader has devised their automated trading strategy and set their algorithms, the next stage is to backtest their approach. This involves using historical data to help them understand how their strategy would have performed in the past.
Backtesting and Demo Accounts
Based on these results, users can tweak their specifications. But be warned that while a strategy may appear to be a winner during backtesting, things can go very differently in the real world. Setting up a demo account is a good idea for new traders. It allows individuals to see how their strategy (or strategies) would perform in real time without risking their hard-earned cash. Only after this stage should an investor consider putting their capital on the line.
Automated trading strategies should be reviewed regularly and amended if necessary. Market conditions always change, and periodic adjustments may be required to boost trading performance.
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9 Tips for Successful Automated Trading
1. Choose the Right Automated Trading Software
Finding the right match for your automated trading journey is crucial. The software you pick will be your companion for your trading endeavors, so take your time and choose wisely. Many options are available, so research and find the one that meets your needs.
Here are some things to consider:
- Compatibility with Your Broker: Ensure your chosen software is compatible. Otherwise, you may experience connectivity issues or other problems.
- User-Friendly Interface: Look for software with a user-friendly interface that is easy to navigate. This will make it easier for you to set up and manage your automated trades.
- Helpful Resources: Choose software that offers helpful resources such as tutorials, FAQs, and customer support. This will make it easier for you to learn how to use the software and get help when needed.
Trying out different software options using a demo account before committing to a particular one is also a good idea. This will allow you to see how well the software works and whether it meets your needs without risking any real money.
2. Use a Reliable VPS for Your Automated Trading
A VPS (Virtual Private Server) is a virtual machine that allows you to host your trading platform and run your trades remotely. A VPS can be especially beneficial for automated trading, as it ensures that your trades are executed even when your computer is turned off or not connected to the internet.
When choosing a VPS provider, look for one with low latency to the broker’s server and a high uptime guarantee. You should also consider the cost and the features offered by different providers, such as:
- Amount of RAM
- Storage
- Bandwidth included in the plan
VPS Maintenance and Security
Remember that using a VPS for automated trading comes with additional responsibilities. You’ll need to ensure that your VPS is secure and that your trading platform and Expert Advisors are updated. It’s also a good idea to regularly back up your VPS to prevent data loss in case of any issues.
One reliable VPS provider for automated trading is QuantVPS. They support major trading platforms, including:
- NinjaTrader
- TradeStation
- MetaTrader
- Interactive Brokers
- Sierra Chart
- Quant Tower
Uninterrupted Trading with 100% Uptime
With 24/7 support and a 100% uptime guarantee, QuantVPS provides a reliable, speed-optimized environment for traders to run their automated strategies continuously and efficiently.
3. Optimize Your Automated Trading Settings
Optimizing your settings is essential to get the most out of your automated trading system. Here are some things to consider:
Test Your Strategies
Before you start live trading, thoroughly test your strategies using a demo or backtesting. This will help you identify weaknesses and make adjustments before risking real money. You can use tools like backtesting software or a demo account to test your strategies and see how they perform under different market conditions.
When testing your strategies, use a large enough sample size and a wide range of market conditions to get a true sense of their performance.
Use Appropriate Risk Management
Automated trading can be risky if not done correctly. Be sure to use appropriate risk management techniques, such as:
- Setting stop-loss orders
- Using a reasonable risk-to-reward ratio
Diversifying your portfolio by using multiple strategies or trading different asset classes is also a good idea. This can help reduce the overall risk of your trades. Regularly review and adjust your risk management settings to ensure they are still appropriate for market conditions.
Consider Your Trade Frequency
Too many trades can be just as harmful as too few. Determine the optimal trade frequency for your strategy and stick to it. Over-trading can lead to increased costs and lower profits, while under-trading can result in missed opportunities. Find a balance that works for you and your strategy. You can also use tools like the Kelly Criterion to help you determine the optimal trade frequency for your account size and risk tolerance.
By optimizing your settings, you can increase the chances of success and minimize the risks of automated trading. Take the time to carefully consider your options and make any necessary adjustments to ensure your computerized trades are as profitable as possible.
4. Choose a Reputable Broker
When it comes to automated trading, your broker’s reputation is critical. A reputable broker will provide a stable and reliable trading environment and a wide range of trading tools and resources. They will also offer competitive spreads and fees and the support you need to succeed in trading.
Choose a Regulated Broker
Be sure to research and choose a broker regulated by a reputable authority, such as the UK Financial Conduct Authority (FCA) or the US National Futures Association (NFA). This will ensure that your funds are protected and that you are trading in a transparent and fair environment.
It’s also a good idea to read online reviews and ask for recommendations from other traders before making your decision. This will give you a better idea of what to expect from different brokers and help you choose one that best meets your needs.
Reputable Brokers for Automated Trading
Two reputable brokers that offer a great selection of trading tools and resources for automated trading are RoboForex and IC Markets. Top-tier authorities regulate both brokers and have a strong reputation among traders. Check them out and see if they might be a good fit for your automated trading needs.
5. Backtest Your Trading Strategy
Before you start using your automated trading strategy on live markets, it’s essential to backtest it to see how it would have performed in the past. Backtesting allows you to see how your strategy would have fared under different market conditions and can help you identify potential weaknesses or areas for improvement.
Backtesting Your Strategy
To backtest your strategy, you must use historical price data and apply your rules to see how it would have performed. Several tools and resources can help you with this process, such as trading platforms with built-in backtesting functionality or dedicated backtesting software.
Testing your strategy on a demo account before moving on to live trading is also a good idea. This will allow you to see how the strategy performs in real time and make any necessary adjustments before risking your capital.
By backtesting and testing your strategy on a demo account, you can gain greater confidence and be more prepared for the unpredictable nature of live markets.
6. Set Realistic Expectations
Having realistic expectations can go a long way in improving your automated trading experience. While it can be a powerful tool for generating profits, it’s important to remember that no trading strategy is foolproof, and there will always be some risk involved.
Protecting Your Capital
This means you should only invest what you can afford to lose and always have a well-defined risk management plan to protect your capital. This plan can include setting stop-loss orders or limiting your trade size to a certain percentage of your account balance.
Balancing Hope and Reality
It’s also a good idea to manage your expectations regarding the potential returns you can achieve. While it’s possible to generate significant profits with automated trading, it’s important to remember that past performance does not indicate future results and that there will be losing trades along the way.
This is why it’s essential to have a well-diversified portfolio and not to put all of your eggs in one basket.
By setting realistic expectations and managing your risk effectively, you can increase your chances of success with automated trading. It’s also a good idea to review your performance regularly and adjust your strategy as needed to ensure that it continues to be effective.
7. Monitor Your Trades and Stay Up-to-Date
While automated trading can handle the execution of trades on your behalf, it’s essential to monitor your trades and stay up-to-date with market conditions regularly. This will help you identify any potential issues or problems with your strategy and allow you to make any necessary adjustments promptly.
It’s also good to stay informed about market news and events that could impact your trades. This can include:
- Economic data releases
- Political developments
- Natural disasters
By staying informed, you can be better prepared for potential market moves and adjust your strategy accordingly.
In addition, keeping your software and trading platform up to date is essential. This will ensure access to the latest features and tools and can help you avoid potential issues or errors.
By monitoring your trades and staying informed, you can increase your chances of success with automated trading and make more informed decisions about your trades.
8. Use Caution with High-Risk Strategies
While high-risk trading strategies can potentially lead to higher returns, they can also lead to significant losses. This is why it’s essential to use caution when considering such strategies and to thoroughly assess the potential risks and rewards before proceeding.
If you decide to use a high-risk strategy, managing your risk carefully is important. This can include:
- Setting appropriate stop-loss orders
- Limiting your trade size
- Diversifying your portfolio to reduce the impact of any potential losses.
Testing Your Strategy
It’s also a good idea to test the strategy on a demo account before using it with real money. This will give you a better idea of how the strategy performs in real time and allow you to make any necessary adjustments before risking your capital.
By using caution and managing your risk effectively, you can minimize the potential risks of high-risk trading strategies and increase your chances of success.
9. Protect Yourself from Scams in Automated Trading
Unfortunately, the popularity of automated trading has also attracted several scams and fraudulent operators. It’s essential to be aware of these potential risks and to take steps to protect yourself.
One common scam in automated trading is the promise of unrealistic returns. If a company or individual claims you can make excessive profits with little or no risk, it’s likely a scam. All investments carry some risk, and you must be realistic about the potential returns you can achieve.
Another red flag to watch out for is the pressure to deposit money quickly. Scammers may try to rush you into depositing before you have had a chance to research and assess the opportunity thoroughly. Take your time, and don’t feel rushed into making a decision.
Beware of Opaque Operations
You should also be wary of companies or individuals who need to be more transparent about their operations. A legitimate business typically provides clear and detailed information about its services, fees, and terms and conditions. If this information is complicated to find or unclear, it’s a potential sign of a scam.
Protect Yourself from Scams
To protect yourself from scams in automated trading, it’s important to research and be cautious of any company or individual that seems too good to be true. Look for reviews, testimonials, and regulatory information, and don’t be afraid to ask questions and get clarification on any issues or concerns you may have.
Related Reading
- Automated Futures Trading Strategies
- Best Automated Futures Trading Software
- Backtesting Trading Strategies
- Best Algorithmic Trading Software for Beginners
- MT4 Trade Copier
Deploy a Trading VPS Today
There’s no denying that automated trading systems are a game-changer for traders. But if you want to get the most out of your algorithmic trading strategies, it’s paramount that you run them on a reliable, high-performance computer.
A trading virtual private server (VPS) is one of the best ways to achieve this. Trading VPS store your trading algorithms on a separate server instead of your local computer. This way, you can run your automated trading strategies 24/7 without relying on your personal computer.
If you experience a power outage or your internet connection drops, your algorithms will continue to run on the VPS until you regain access. VPS solutions also deliver faster execution speeds, providing a more stable environment for your automated trading strategies.