An algorithmic trading systems has many advantages over discretionary measures. Within this article, we explore the features of an automated trading system tailored for long-term consistency and system stability.
Benefits of an Algorithmic Trading System
- Logically developed automated trading systems usually have higher performance than human trading. This is because an automated trading system cuts through all the high probability arrangements within a strategy, while individuals skip trades or alter trade positions as a result of various cognitive biases and sentiments.
- Automated trading systems identify subtle profitable patterns through thorough data mining, analysis and testing that would fly under the radar of most traders.
- The reproducibility of decisions and success by automated systems outweighs the subjective whims that characterize human-driven trading strategies.
- The dynamic nature and responsiveness of the best performing automated trading systems ensure that luck increasingly give way to trading expertise in leading to results.
- The best automated trading systems are able to improve their performance by filtering trading positions. This proceeds in a two-step process. First, an automated trading system generates all possible trade setups that go in tandem with a trading strategy. Secondly, the automated trading system weeds out the lower probability setups to allow execution of the best trades only.
Processes involved in building an Algorithmic Trading System
Regardless of the primary objective of developing an automated trading system, as a standalone system or as a filtering system, it is important to implement these two methods to gain long-term trading success.
1. Rules Based (IF/THEN rules)
You have to specify the exact rules beforehand for a rule-based automated trading system to make a trade decision.
2. Predictive model
Using a variety of indicators derived from historical data such as volume, price, volatility and other elements, the predictive model employs the use of complex mathematical computations to discover repeatable patterns with substantial predictive power.
Advantages of Algorithmic Trading Systems over a Rule-based System
- Trading systems are able to detect subtle complex patterns that cannot be picked up by a human.
- A well-developed automated trading system often provides limitless opportunities to fine-tune parameters leading to higher success rate.
- Outstanding automated trading system are adapted to complement human intuition and decision-making processes by infusing information extracted from convoluted data sets. In follows that, the predictive model at all levels dwarfs human intuition in performance and trading success.
- Repeatable patterns underscore the most profitable trades, and predictive trading systems are fully equipped to detect these patterns. Discovering these patterns is the hardest part, as once they are discovered, it is easier for the automated trading system to analyze incoming data in hopes of identifying a possible reoccurrence of the patter for an express order setup.
Algorithmic Trading System Roundup
The elite algorithmic trading systems imbibe useful tenets of both the rule-based and predictive model over a preference of any one model. In this combined arrangement, the rules-based model oversees the establishment of positions and money management, while the predictive model is concerned with obtaining and analyzing information that are influential on predicting price targets, trends, stops, cycles and other elements useful in placing orders.