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All About Automated Trading Systems

You may have heard about automated trading systems, also known as algorithmic trading, algo trading or robo trading. These computer-based trading applications let you automatically buy and sell securities on an exchange. As an investor, you subscribe to an automated trading service and fund your account, but because everything is automated, you don't need to spend a lot of time reviewing how the system is working. If you discover over time that you don't like a particular service, you can unsubscribe and move on to another one. It's a simpler alternative to online stock trading.

It's fairly simple to get started with automated trading. There are many stock trading services to choose from, and when you sign up with one, you typically set up a strategy for trading stocks, options and even foreign currency (forex). Once you've reviewed and settled on a trading strategy, you open your account with an online broker or sync your automated trading account with an existing brokerage account.

Once you've funded your account for automated trading, the system takes over and executes the strategy you've chosen. Since this type of trading is based on algorithms and statistical data, your account will buy or sell the securities or other holdings you've chosen for your strategy as the market moves and crosses certain statistical barriers. You track how your strategic trading is going, and if you're happy with its performance, you can continue to maintain the account.

Fortunately, even though algorithmic trading is automated, you are not locked in to your strategic picks. If a security isn't performing up to your expectations, you can intervene and stop trading to prevent losses. You can also liquidate and delete positions altogether if you determine a security should not be part of your trading strategy or portfolio.

Automated trading offers some advantages. It lets you set your strategy ahead of time and maintain it without extra effort. It can help you avoid the temptation of overinvesting in a trend or trading emotionally. It keeps up with fast changes, such as with day trading or forex. It also allows you to walk away from the stock market, such as while on vacation, and still actively invest.

Automated trading is not for everyone, however. Most systems require frequent trading and an opening account balance of at least $5,000. Remember that every trade you make comes with a commission, so you'll be paying fees for your frequent trades and racking up costs along the way. If you prefer to follow a buy-and-hold strategy, automated trading is not for you.

On the other hand, if you're fine with frequent trades and want to put your account on a type of autopilot, this is an approach you may want to research further. Investors actively engaged in automated trading can frequently improve their returns over time and do so without spending a lot of energy researching securities. Most automated trading systems use a combination of statistical analysis and technology to analyze security positions so that the things you don't have time to research are taken care of for you.

Some Automated Trading Programs to Consider

Many online trading brokers offer stock trading software that includes a tool for automated stock trading. If you prefer to have you own system, there are some, such as RightEdge, which are fully independent. You design your own program, put in your algorithms and strategies, and then connect the program to your brokerage.

RightEdge trading system provides a framework for creating comprehensive stock management systems. You can trade in anything from small- to large-cap stocks. The drag-and-drop capabilities let you organize your investment monitoring tools. Using C# and Visual Basic, you can create and modify your trading platform, then backtest the application to ensure it works to your specifications. The software gives recommendations on system optimization to better hone your trading experience.

Blue Wave Trading
BlueWave Trading provides automated trading systems for TradeStation and NinjaTrader. It started with TradeStation in 1997 and then developed an algotrading system for NinjaTrader in 2007. It bases its strategies there on thousands of hours of market observation and screen time. Its algorithms work on a multitude of markets as well as bar types and can handle high or low frequency trading, scalp, day trade and swing trade strategies.

AltaVest iSystems
AltaVest is an investment company founded in 1997. Its iSystems provide fully automated trading in over 300 systems, which an AltaVest trading advisor can help you select. Regardless of the system, it can handle multiple markets including U.S. and foreign stock index futures, currency futures and crude oil futures. The system is backtested, forward-tested and uses live-trading performance data. You can trade in real time. You can view a hypothetical account, request a demo or sign up for an account via the website.

This system offers trend identification, cycle analysis, buy/sell side volume flows, multiple trading strategies, dynamic entry, and target and stop prices. AlgoTrades does the searching, timing and trading for you using its strategies based on trends the system finds. You can follow these strategies manually via email and SMS text alerts. It's promoted as an alternative to standard investment practices of IRAs as well as for stock trading. If you wish to try this system, you can invest as little as 5 percent of your ITA, 401K or investments account.

Automated trading systems appeal to investors who understand how the market works and want more control over their trading without having to manually research and make every trading decision.

There's risk involved with automated trading just as there is risk involved in manual trading, but automatic trading can help you expand your asset classes, get into stocks you might not have known about and make money on more trades than you could with manual trading.

Automated stock trading can also be used as a complement to manual trading in an online account so you have the best of both worlds – the automatic system making trades for you while you're doing research and executing your own transactions on the side.