There is a significant shift occurring in the markets as we speak, some of you may have heard of it but have not given it due attention. You might have thought that it was just a new fad or it will not gain traction, but the reality is, automated trading is becoming more and more popular day by day.
Top Automated Trading styles
Algorithmic Trading:
Algorithmic trading is a proven method of automated trading that utilizes advanced mathematical models and algorithms to facilitate rapid decision-making and transactions for traders. By utilizing complex strategies such as time series analysis, algorithmic trading aims to identify patterns in financial markets and execute trades based on those patterns. As it is based on predetermined rules, algorithmic trading eliminates the influence of human emotion, ensuring traders adhere to their investment plans.
Algorithmic trading’s appeal lies in its ability to automate trading decisions, thus reducing the need for human intervention. This results in faster and more efficient trading outcomes, potentially leading to greater profitability. Moreover, the use of sophisticated mathematical models and algorithms allows for real-time evaluation of vast amounts of data and market variables, enabling traders to respond quickly to changes in the market.
In summary, algorithmic trading is a reliable method of automated trading that leverages advanced mathematical models and algorithms for fast decision-making and transactions. It eliminates human emotion, ensuring adherence to investment plans, and offers fast and efficient trading outcomes.
High Frequency Trading (HFT):
High-frequency trading (HFT) is an automated trading strategy that leverages cutting-edge computer systems to execute large volumes of trades at lightning-fast speeds. These sophisticated HFT systems are capable of conducting thousands or even millions of trades within milliseconds, facilitated by powerful computers and servers situated in data centers across the globe. The overarching goal of HFT is to exploit short-term fluctuations and capture small profits in rapid succession, enabling traders to generate significant profits with minimal risk.
The use of advanced computer systems in HFT allows for the rapid processing of vast amounts of market data and the implementation of complex trading algorithms that enable traders to identify and capitalize on fleeting opportunities. The speed and efficiency of HFT systems are critical to their success, as they enable traders to execute trades within fractions of a second, taking advantage of market movements in real-time.
Although HFT has been a source of controversy in the financial industry, its use has become widespread due to the potential for substantial profits and the high level of automation it provides. By leveraging cutting-edge technology, HFT offers traders a competitive edge in the market, allowing them to make trading decisions with speed and precision. Overall, HFT is a sophisticated and complex automated trading strategy that has revolutionized the financial landscape, enabling traders to generate significant profits with unprecedented speed and efficiency.
Automated Market Making (AMM):
Automated market making (AMM) is a prevalent form of automated trading that employs complex algorithms to continually post bid and ask prices for a specific security or asset. The overarching goal of AMM is to provide liquidity to markets by posting both buy and sell orders, while simultaneously seeking to minimize market impact and transaction costs. By facilitating liquidity provision, automated market makers can help reduce bid-ask spreads and improve overall market efficiency.
The use of advanced algorithms in AMM enables market makers to respond rapidly to changes in market conditions and adjust their bid-ask prices accordingly, thereby ensuring that liquidity is continuously provided to the market. Moreover, the automation of market making reduces the need for human intervention, thus minimizing the potential for human error and improving trading efficiency.
Overall, automated market making is a sophisticated and widely used form of automated trading that plays a vital role in market liquidity provision. By continually posting bid and ask prices, AMM helps to reduce spreads, improve market efficiency, and facilitate trading. The use of advanced algorithms and automation in AMM underscores its importance as a critical component of modern financial markets.
Portfolio trading is a powerful form of automated trading that considers the entirety of holdings within a portfolio of assets, executing trades based on the desired allocation. This approach is particularly valuable for portfolio managers who seek to maintain a consistent risk profile while capitalizing on market opportunities. Portfolio trading enables traders to calculate the optimal mix of assets for maximum returns while minimizing risk.
Using advanced algorithms and automated trading systems, portfolio trading enables traders to manage complex portfolios with ease and efficiency. Traders can execute trades with precision and accuracy, ensuring the portfolio’s overall risk exposure remains within predetermined limits. Additionally, portfolio trading facilitates diversification by allowing traders to spread investments across multiple asset classes, thereby reducing the portfolio’s exposure to specific risks.
Overall, portfolio trading is a highly sophisticated and widely used form of automated trading that plays a crucial role in portfolio management. By leveraging advanced algorithms and automation, portfolio trading enables traders to maintain a consistent risk profile while capitalizing on market opportunities to maximize returns. The ability to diversify investments and manage complex portfolios efficiently underscores the importance of portfolio trading in modern financial markets.
Statistical Arbitrage:
Statistical arbitrage is an automated trading strategy widely used by institutional investors and hedge funds to capitalize on pricing discrepancies in financial markets. This trading approach uses advanced quantitative models and data mining techniques, including machine learning, to identify mispriced securities and execute trades accordingly. By continually scanning markets for pricing anomalies, traders can generate alpha and minimize exposure to market risk.
The use of advanced quantitative models and machine learning algorithms in statistical arbitrage enables traders to identify pricing discrepancies that may not be apparent through traditional analysis methods. Traders can then execute trades based on their statistical models, thereby generating profits while minimizing risk. Statistical arbitrage is widely applicable across multiple asset classes, including equities, bonds, and derivatives, making it a versatile and attractive strategy for institutional investors seeking to diversify their portfolios and maximize returns.
In summary, statistical arbitrage is a highly sophisticated and versatile form of automated trading that plays a crucial role in improving market efficiency and generating alpha. The use of advanced quantitative models and machine learning algorithms enables traders to identify and capitalize on market inefficiencies, thereby generating profits while minimizing risk. Its versatility across multiple asset classes underscores its importance as a critical component of modern financial markets.
As traders you know that it is important to adapt to markets as they continuously shift and change. This applies to everyone regardless if you are a value or momentum trader, invest in low risk income assets or if you are a high end foreign exchanges trader.
Technological changes affects every single one of us and it will catch up to us whether we like it or not. The current trend regarding automated trading is so strong that I’m confident you have seen a media story about automated trading by one of the mainstream platform providers/brokers or even on your news feeds. It has arrived and it is here to stay.
Many analysts see this phenomenon to be the next big thing in electronic trading and are expecting it to take over most of the trading volume (if it hasn’t already) in the near future.
But what is automated trading and why has it become so important in ones trading?
Automated trading is simply a set of buy and sell rules which can be programmed to run 24 hrs a day 5 days a week. These rules are the same when you trade manually like many traders today. They reside on your computer and they monitor and analyze the markets for you even when you are not in front of your screens and if necessary, trade on your behalf.
The ability to trade 24hrs a day enables traders to make the most of any good trading system. For example, it allows Australian traders to take advantage of many trading opportunities in the late European session or most of the US session which would have otherwise been missed due to the time differences. This means your trading is effective when opportunities present themselves.
Many people talk about taking the emotion out of trading, but lets be honest this is not something many traders do very well. Some research suggest we get twice as emotional in a losing trade than excited in a winning trade. Compare this with automated trading which is completely neutral (no emotion at all). Automated robots simply don’t care if we have lost or made money in our previous trades. They logically assess the market and make a decision to buy or sell based on the available capital, market information and our specific rules. They never get tired or stressed and won’t make typical mistakes such as over trading or not trading at all. They simply do their job regardless of how you feel at the time.
The ability to react fast is another great advantage of automated trading. Many of us trade in some of the fastest markets (like FX ) and need immediate logical decision making ability to place a trade. Unfortunately our brains are not designed for such high speed, rapidly changing environments. We have all made bad decisions when we are rushed and are under pressure. Automated trading algorithms on the other hand , will never feel any pressure and can handle many operations in a split second. Therefore they can process all the available information and make the logical decision when our brains usually stall.
Do you need to consider it or should you completely dismiss it?
By their very nature automated trading systems should be objective and quantitative (Otherwise computers won’t be able to make any sense of them). Therefore you can easily evaluate and test your strategies. We have discussed in our previous articles that objective and quantitative trading systems are superior to discretionary systems, don’t take our word for it read this article.
The main reason for this is that you can reliably measure the performance and robustness of an objective system and the results of such system should be replicated regardless who operates them. This option simply doesn’t exist for a discretionary system which can easily be affected by our own biases, emotions and lack of accurate calculations.
Keeping the above in mind , we believe that automated trading is definitely the way to go. You are up against some very smart professionals in this game who have an edge and you need to be equipped with the most cutting edge tool to win. The trend has already started with many professional traders already taking advantages of benefits of such systems.
What are the risks and failures?
As appealing and convenient automated trading systems sound, you should also be aware of the potential risks especially if you are dipping your toe in the water for the very first time.
One source of risk for automated traders can be created by technical failures. Lost or slow connection to servers is when your system can’t communicate with the market. This can be very costly if you are in the middle of a trade and your system is unable to respond.
Bad tick or erroneous data produced by your data feed provider or broker is another potential issue which you need to be on top of. These ticks can create false alarms and therefore make your system trigger undue trades. Trading with a reliable platform provider and the best trading tools and knowing exactly how your system works can minimize this risk to a great degree.
It is extremely important that the automated trading systems are based on sound economic and verified trading rules. At the end of the day ,these systems can only do what they are programmed to do. “Garbage In Garbage Out ” is an old saying among automated traders which basically means that if you don’t spend enough time to perform thorough due diligence on the trading rules you are going to implement , the results are going to be very disappointing.
That’s why building your own systems lets you go deep inside to understand how they are structured. Therefore you should be very cautious when offered off- the shelf automated trading robots (also known as Expert Advisors ) especially those that promise you the world for a small fee.
I will leave you with this thought, if you had a system that worked so well, how much would you charge for it? Goldman Sachs spends millions of dollars developing their systems.
Conclusion
Yes the article is geared to the positives of automated trading but is does so because our preferred approach at Trade View is to learn and create our own systems and we think it is important that all traders do the same. This way you will know exactly what your rules are, you will remain in charge of your trading system and can make necessary amendments when market conditions call for a new updated version of your trading rules.
The design and implementation of automated trading systems are a delicate process but can be taught with some practice. We at Trade View have an effective program for pro-active traders who want to take advantage of such innovations. In our In-House Systems Building Workshop we teach and mentor our traders on how to design and trade automated systems which suit your personal trading preferences.
Our Online Systems Building Workshop goes one step further as we can guide you and give you access to three trading models and mentor you for 12 months.
Either way don’t let the markets pass you by and trade outdated models.
ITS TIME TO MOVE FORWARD IN YOUR TRADING.
