Automated trading platforms, and systems are taking off, and becoming more and more popular. With online trading growing rapidly in the past few years, many are looking to continue trading, but without the extensive time commitment that is required.
On one hand, automated trading platforms provide a solution to this time problem; on the other, they take a little time to set up. It is the case of the one off time commitment (with small check ins) vs the consistency required to make the markets work for you.
In this guide, we are going to outline the 5 main types of automated trading systems (or platforms) available, as well as quickly covering off what an automated trading platform is, and how the various options work. Is automated trading for you? Let’s find out.
What are automated trading platforms?
In proper terms, automated trading platforms are computer software programs that are set up to place buy and sell orders on behalf of you as a trader.
This is done by using a set of predetermined rules that you can programme into the software yourself, or that have been predefined by someone else, and can be bought and implemented.
Once the rules are met, the software will automatically generate a trade signal and place the order with a broker (assuming you have linked this to your account).
There is however, more than one way to skin a cat (or so the saying goes).
So whilst automated trading platforms may be technically a form of algorithmic trading in a pure sense, many people use the same terminology for a series of other trading platforms that work towards the same end.
The 5 main types of automated trading platforms & systems
There are various different types of automated trading platforms that you can use to work towards the same goal. These include social trading, copy trading platforms, robo advisors, expert advisors, and algorithmic trading platforms. Signals platforms can support in automating certain elements of trading (such as opportunity spotting), but they don’t quite fall into the fully automated trading system category.
Social trading platforms
Social trading platforms are a type of automated trading platform that allow you to copy the trades of other successful traders. This means that you do not have to do any research yourself or worry about making your own trade decisions.
Copy trading platforms
Copy trading platforms are very similar to social trading platforms. However, with copy trading platforms, you are not copying the entire trade of another trader. Instead, you are only copying a portion of their trade.
This can be a good way to get started with automated trading without having to worry about making all of the trade decisions yourself.
Robo advisors are a type of automated trading platform that will manage your investment portfolio for you. They do this by using algorithms to make trade decisions on your behalf.
This can be a good option if you do not want to worry about making all of the trade decisions yourself but still want some control over your investments.
Expert advisors are a type of automated trading software that can be added to platforms such as MT4 and are predefined by ‘expert’ traders. These EAs can be set up to trigger a signal for you to execute or ignore manually each time, or automatically process when specific conditions are met.
Algorithmic trading platforms
Algorithmic trading platforms are a type of automated trading platform that use algorithms to make trade decisions on your behalf. These platforms are usually used by professional traders who have a lot of experience in the markets.
What are the benefits of using automated trading systems?
There are several benefits to using an automated trading platform, apart from the aforementioned time saved in processing and watching charts.
Trading driven by rules, not emotions
The main advantage to using automated trading systems are that they can take the emotion out of trading and help with trading psychology challenges.
When you are manually placing trades, it can be easy to let your emotions get the better of you and make impulsive decisions. This is often what leads to people making bad trades and losing money.
With an automated trading platform, you can set your rules in advance and know that the trade will only be placed if all of the conditions are met. This means that you can stay disciplined and not make any rash decisions that could cost you money.
Faster processing can create more opportunity
Another benefit of using an automated trading platform is that it can place trades much faster than you could manually. This is because the software can scan multiple markets for opportunities simultaneously and then place the trade almost instantly. This can be a big advantage if you are trying to take advantage of fleeting market conditions.
Additional trading strategies come into play
The success of scalping as a trading technique in general can be amplified by the use of an automated trading platform. This is because scalp trades rely on being able to place orders very quickly in order to make a small profit. If you were trying to do this manually, it can be very difficult to place the trade fast enough or to maintain the level of attention required (unless you a full-time trader).
What are the risks of using an automated trading platform?
There are also some risks to using an automated trading platform, as there are in any other aspect of trading.
Software issues are not common, but possible
One of the main risks is that you can lose money if the software is either faulty, makes a mistake. This could be due to a glitch in the software or because the conditions that you set were not met properly. This is a rare occurrence, but can happen.
Over-reliance at your own expense
Another risk is that you can become too reliant on the automated trading software. If you rely on the software to place all of your trades, then you may not develop your own trading skills in order to be able to better manage the systems you are putting in place.
This could leave you at a disadvantage if the software were to stop working or if there were any major changes in the markets that the software was not programmed to deal with.
It is also important to remember that an automated trading platform is only as good as the rules that you set for it. If you (or someone else) set bad rules, or if you do not understand how to properly use the software, then you can end up on the wrong side of the trade.
The above risks are mainly in relation to automated trading systems such as algos, or expert advisors, but there are also different types of risks in some of the other types of auto trading.
Third party risk in certain automated trading systems
The third party risk when you are copying or social trading is very evident, in that you are relying on someone else to properly execute and spot good trading opportunities. Managed forex trading in general has the element of trust being placed in a third party that you cannot remove, but you can take steps.
What you can do to mitigate some of this risk, is keep your risk low, and monitor closely the trades that are being either processed or suggested to ensure that it fit’s your requirements.
There will be bad players and scams in these areas just as there are in any other, so it is important to ensure that you do your due diligence and go into a test with a new provider with your eyes wide open.
How do I start using an automated trading platform?
Once you have chosen the best automated trading platform for you, the next step is to set up your account and deposit money into it. Once you have done this, you will be able to start trading with some simple configurations.
It is important to remember that regardless of how you are trading, you should only trade with money that you can afford to lose. This is because there is always a risk of losing money when trading in the financial markets.
If you are new to trading, then it may be a good idea to start with a demo account. This will allow you to get used to the platform and how it works without risking any real money.
Once you feel comfortable using the platform, you can then start trading with real money, or a minimum deposit.
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