Automated Trading Systems (ATS) are systems that make use of computer programs or algorithms to execute the strategies of traders and investors on their behalf. These systems operate without daily human supervision because they are programmed to analyze market data, identify trading opportunities, and place orders based on predetermined criteria.
ATS in the Foreign Exchange Market uses technical indicators, price patterns, and mathematical equations in making trading decisions. These systems may vary greatly, from simple as mere execution of orders when some conditions are satisfied, to extremely complicated ones such as trend following, mean reversion, arbitrage, and others. ATS are often popular with those just starting out on their trading and investing journey.
Let’s explore the important points a trader needs to know before using automated mechanics.
Advantages of Automated Systems in Trading
The use of automated systems in trading has been very beneficial to traders, here are some of the reasons why
Diversifying Trading
The user can trade with multiple accounts or different strategies simultaneously using automated trading systems. This can distribute the risk over the instruments while providing a cover against losing positions. One of the most difficult things for a human would be to complete this task quickly. However, a computer can finish it in milliseconds. The computer is capable of scanning for trading opportunities throughout multiple markets, placing orders, and watching trades.
Backtesting
Backtesting is applying the trading rules to the historical market data to verify whether the idea is feasible or not. In designing a trading system that is automated all rules must be absolute, with no room for interpretation. The computer cannot make assumptions and it must be instructed in detail on how to do it. The traders can use these well-defined algorithms as a basis for experimenting with historical data before trying them in live trading. Backtesting is one of the most important stages in trading which allows the trader to evaluate and fine-tune a trading idea, and to find the expectancy of the system – that is to say, the average amount a trader can expect to win (or lose) per unit of risk.
Preserving Discipline
The discipline is still maintained even in volatile markets since trade rules are set out and trade execution is performed automatically. Discipline is frequently weakened because of emotions, such as the fear of taking a loss or greed in trying to extract an extra profit from a trade. Automated trading systems help to ensure that discipline is maintained as the system will adhere exactly to the trading plan. Also, the probability of “pilot error” will decrease.
24/7 Trading
Automatic trading systems can trade at any moment of the day nonstop, that is, during 24 hours a day, 7 days a week without requiring human intervention. Therefore, it is most useful in the global market where the financial instrument is traded at different times in different periods with different time zones.
Risk Management
Advanced risk management techniques is what an automatic system can apply. They could also define fixed levels where the position can/s be stopped, control position sizes, and implement other risk management actions to protect the capital.
A vivid representative of international companies that have ATS tools in their trading platform is Olymp Trade broker, which has been operating on the trading market since 2014. In addition to traditional and modern financial instruments, the company offers advanced FTT (Fixed Time Trades) and FT (Flex Trades) mechanics as a solution for automated trading. These tools not only have the above mentioned advantages, but also differ from other brokers’ offers on the market in terms of transparency and the fact that the final decision is still left to the trader.
Risks and Impact on Market Dynamics
Despite the benefits, there are issues that every trader should keep in mind and be prepared for automated trading systems.
Technical Failures
Automated trading systems are subject to technical failures such as hardware malfunctions, software bugs or connectivity problems. Such failures may result in missed opportunities, particularly during periods of high market volatility.
Over-Optimization
Over-optimization of automated trading strategies for historical data may lead to deterioration of their performance in real market conditions. Strategies that are overly focused on past market behavior may fail to adapt to changing market dynamics. Olymp Trade has optimized the platform so that the trader can apply analysis and influence automatic processes. And to make it easier for beginners to cope too, the company regularly provides free training materials and webinars.
Market Risks
Automated trading systems are not immune to market risks, including sharp price movements, sudden collapses or geopolitical events. While these systems can execute trades quickly, they can also exacerbate losses during periods of extreme market volatility if risk management measures are not properly implemented. A great advantage in this process is the trader’s understanding that the market is unpredictable and disappointments can occur along with victories, but a broker acting as a service provider can implement safeguards to maximize protection against events for which no one can be prepared for in advance. Such functions in trading platforms are Take Profit, Stop Loss or other.
What do traders need to overcome to learn all the ATS benefits and minimize the risks?
To take full advantage of automated trading systems (ATS) and minimize the risks associated with them, traders need to overcome a number challenges:
Technical Understanding
Traders should be well versed in the principles of automated trading systems. The accumulation of technical knowledge allows traders to customize and optimize ATSs according to their trading strategies and risk tolerance.
Market Knowledge
Comprehensive knowledge of financial markets, including macroeconomic factors, market trends and asset classes, is critical for effective automated trading. Traders need to constantly analyze market data and adapt their strategies to changing market conditions to maximize profits and minimize risk.
Continuous Learning
Financial markets are dynamic and constantly evolving, which requires traders to stay informed about new trading technologies, changes in legislation and market developments. Constant training and adaptation allow traders to stay ahead of the curve and remain competitive in automated trading.
By overcoming these challenges and constantly improving their skills, traders can utilize the full potential of automated trading systems while effectively managing risk.
Conclusion
ATS is a milestone of the financial market sector by its strengths and weaknesses. The speed, efficiency and objectivity of ATBs allowed traders to take advantage of market opportunities, to increase liquidity and to also improve the overall market efficiency. Historical data testing of trading strategies facilitates an increase of the actuality of decisions taken, so the repetition of the cycle of algorithmic trading evolution.
Dealing with automated mechanics should always involve knowing the intricacies of the platform itself and the impact of automated systems on the fluctuations of the quick market price movements. Although ATS helps to increase the market liquidity and efficiency, the potential risks of algorithmic trading for traders as well as regulators should not be underestimated.
However, in the age of technological development and AI, there is an opinion that ATSs will continue to be improved, becoming more mainstream compared to the heavyweight trading systems popular in the past decade. In the age of information overwhelming and computer software development, it’s wise to choose a company that makes breakthroughs in technological development and optimizes processes that can and should be optimized. But don’t forget that any automation requires double-checking and knowledge of how to handle it.
