Automated Day Trading

Automated Day Trading Explained

You decide on strategy and rules. This is then programmed into an automated system and then the computer works. The software you can get today is very sophisticated.

Trading entry and exit rules can be rooted in simple conditions, such as the movement of a moving average.

However, they can also be built on complex strategies, which require a deep understanding of the programming language specific to your platform.

Once the rules are programmed, the automated system can monitor the market, decide whether to buy and sell based on the rules of the specific day trading strategy you have chosen.

Although depending on your specifications, once a trade is entered, orders for protective stops, trailing stops and profit targets will all be automatically generated by your day trading algorithm.

If you’re in a fast-moving market, quick order entry can be the difference between a small loss and an earth-shattering one if the trade moves in your direction.

Some advanced automated day trading software will monitor the news to help make your trades.

Strength of weakness

Strength

• Reducing emotion – One of the biggest benefits of automated day trading algorithms is their ability to eliminate human emotion. Many day traders will buy and sell based on feelings, automated day trading systems will execute trades once the set rules have been met.
• Backtesting capabilities – Most automated systems will allow you to test your rules and strategies against historical data to test their effectiveness. This allows you to hone the perfect strategy and eliminate the cracks before you put real money on the line. It also allows you to determine the system’s expectation (the amount you expect to win or lose).
• Speed ​​– Your automated software will give you improved order entry speed. Able to automatically change to market conditions and generate orders when trading criteria are met. In the game of day trading just a few seconds can make a significant difference to a potential win or loss. It will prevent you from reaching the profit target or dropping the stop before you successfully enter the order.
• Consistency – This links back to the emotional element. If you lose in the last four trades, you might get cold feet on the next one. But if the next trade is a big winner, you’re just shooting yourself in the foot very expensively.
• Cements a winning formula – If you’ve spent years perfecting a winning strategy, then automating it can make it more efficient. Which can give you bigger and more consistent profits.
• Diversity – An automated day trading system allows you to improve your hand by using multiple accounts and multiple strategies at the same time. This allows you to spread risk over different instruments while still hedging against losing positions.

Weakness

• The system is gone – Even the best automated day trading software can trigger false trends. Because prices react to developments, false trends can get out of control. This was demonstrated in August 2012 by the Knight Capital group; who lost over $440 million in just half an hour when their trading software went haywire in response to market conditions.
• Updates – Your automated day trading software needs to update along with changing market conditions. This means you need someone who knows exactly what they are doing. This puts you at the unwelcome mercy of whoever writes and updates your software.
• Monitoring – People mistakenly think that once they have formulated their day trading strategy, they can sit back and let the computer do all the heavy lifting. You have to watch out for computer crashes, connection issues, the inevitable market anomalies. Not to mention anything that could cause orders to be lost or duplicated.
• Greater optimization – The focus on curve fitting leads to automated day trading algorithms that should be great in theory, but often fall short of the mark when it comes to executing trades. For example; many people put together plans with almost 100% profitable profits that never experience withdrawals. Apply it to the live market and it can really fail. This is why you should stick with low trade values ​​until you iron out all the creases.

Begin

Even with the best automated software there are some things to keep in mind. First, keep it simple as you gain experience, then turn your hand to more complex day trading strategies.

Copy Trading is probably a solid introduction for beginners to automated trading.

Many automated systems are tuned to excel in specific markets and for specific trading styles.

So keep in mind that you may not get the returns you expect if you apply your automated day trading algorithm to several different markets.

Whatever your automation software is, make sure you create a pure strategy. Automated day trading systems cannot make predictions, so remove all wisdom.

Trade Copy

At its most basic level, copy trading is a very simple form of automated trading.

With Copy Trading, you can copy the trades of other traders. So by studying past performance and specific trade details, you can ‘follow’ a trader, (or better yet, a group of traders).

As they open and close trades, you will see open trades on your account as well. You can adjust how much you want to invest, so someone with $100 can still follow the trade of someone who made a $1 million trade.

Copy trading means you are not responsible for opening and closing trades. You still have to choose a trader to copy, but all other trading decisions are taken out of your hands.

Copy trades are probably the least “hand” of any automated trade.

Finding the Best Automation Software

There is no one size fits all automated day trading system.

It depends on your needs, the market you want to apply to, and how much customization you want to do yourself.

Advanced traders may even want to develop their own trading software from the ground up, to achieve ultra-fast automated trading that is fully tailored to their preferences (more on that later).

Here are some of the most popular ready-made automated systems out there:

• AlgoTrader software
• MetaTrader (MT4 and MT5)
• Tradestation Automation Software
• Etna Automated Trading Software
• eSignal Automated Trading Software
• Automated Options Robot Software (Demo Trading only)
• Roboadvisors

Develop Your Own Software

If you cannot find commercially available software that provides you with the functionality you need, then another option is to develop your own proprietary software.

Doing so is easier than ever thanks to code editing tools like VIM and online marketplaces that make it easy to find freelancers with the skills you need.

Developing your own software carries a number of benefits and risks:

Benefits:

• Complete control over how software works, looks and feels.
• You can optimize the software to work faster than existing commercial software because you can only include the features you need.
• Allows you to build software around complex algorithms.

Risk:

• It can be expensive if you don’t know how to do it yourself. As with most construction projects, the final cost is usually higher than the initial estimate.
• This software will be tested and will almost certainly contain bugs. Commercial software has gone through thousands of hours of testing and is used by thousands of traders, showing many problems. Your software may behave in unexpected ways. Even large commercial operations have problems with trading robots running surprise trades or being triggered by the actions of other robots to make large sales.

Research all the software available in the market before you decide to develop your own software.

There are two main ways to build your own trading software. Do it yourself or hire someone else to design it for you.

Programming Your Own Software

Designing your own trading software requires a basic understanding of programming as well as knowledge of how to code trading algorithms.

Various software packages help make the process easier, but they all require you to have basic programming knowledge.

No tool can help with a lack of programming skills, but for knowledgeable programmers one of the best editors to build your automated trading bot is Vim.

Vim is a universal text editor designed specifically to make it easy to develop your own software. It was created by the founder of Vim, Bram Moolenaar, in 1991.

Vim is based on Bill Joy’s text editor. Vim is “charity” – all proceeds go to help children in Uganda. Vim makes it very easy to create and edit software.

Vim is a command-based editor – you use text commands, not menus, to activate different functions.

The command-based interface allows the software to have a very lightweight clean interface and still offer a wide range of features.

Vim is suitable for both beginners and experienced developers.

The platform is very popular among software developers because of how easy it is to create an overview of your code and find bugs before they cause problems.

It can be customized to handle hundreds of programming languages ​​and supports a wide variety of plugins for additional features.

API

If you choose to develop the software then you are free to make it almost anything you want.

However, your freedom will be limited by the API (Application Programming Interface) provided by your trading platform.

The API is what allows your trading software to communicate with the trading platform to place orders.

Your trading software can only make trades that are supported by third-party trading platform APIs.

If a certain feature is very important to you, you should make sure to choose a platform with an API that offers that functionality.

Your bot will also need to import market data in some way, possibly in “real time” (with very low latency), if your trading algorithm is in any way to react to what is happening right now in the market.

If trading decisions are based more on fundamental factors and just waiting for the “right price”, getting market data with a millisecond delay may not matter.

Hiring Software Developers

If you don’t know how to make the software yourself or if you don’t have the time to do so, then you need to hire a freelancer or a third-party company.

You can choose a local developer or an online freelancer. It’s easier to communicate with, and achieve the desired results, using local developers that you can see for yourself.

However, using online freelancers can be cheaper. It also allows you to choose developers who are more experienced in trading software, as this is a rather unusual skill.

Make sure to hire skilled developers who can develop software that works well. Don’t try to do it cheaper if possible.

Good trading software is worth its weight in gold. A well-designed robot can cost a lot of money and end up being very expensive.

It is important that you provide the developer with a detailed description of what you expect from the trading software. Include all desired functions in the job description.

Don’t assume that anything is a given. Developers cannot read your mind and may not know or assume the same things you do.

Final decision

Automated day trading is becoming increasingly popular. However, if you go down that route, you must come back and test your strategy regularly. Let’s be clear, there is no substitute for carefully executing manual trades.

If you put your faith in automation, don’t be complacent.

This is highlighted in the ‘Market Wizards’ book series by Jack Schwager, when he interviews successful automated day traders.

All insist that they are very involved with their automated strategies, so don’t take a back seat to your trading.

Further reading