Autotrading

What Is Autotrading?

Autotrading is a trading plan where buy and sell orders are automatically placed based on an underlying system or program. These orders are placed when the trade conditions in the underlying system or program are met.

Understanding Autotrading

Autotrading allows investors to capitalize on market opportunities in real time. It typically involves complex programming and, in some cases, sophisticated trading platforms that support external programming or plug-ins.

Traders can design their application or connect to a program, to make automated trades based on a customized strategy.

Basic forms of autotrading can be utilized by all types of retail investors. For example, setting orders that will execute in the future when certain criteria are met is the most basic form of autotrading.

On a more advanced level, autotrading eliminates human input entirely. Once the software is programmed, it will continue to run without the need for human interference or input. In the advanced case, traders will still monitor their programs closely to make sure it is operating as expected.

Overall, autotrading systems are used in a wide range of markets including stocks, futures, options, and forex.

Autotrading Capabilities

Autotrading requires a predetermined trading strategy. The strategy is the basis for the computerized program, defining when and why it will trade. It can be structured in various ways for all types of investors.

Retail investors may deploy basic autotrading plans that make investments at regular intervals, or that place conditional orders in stocks that meet certain parameters. Conditional orders allow an investor to enter trades at specified levels for automatic execution when a price is reached.

Institutional investors and technical traders will use complex systems that allow for conditional orders and strategies such as grid trading, trend trading, scalping, or fading.

Many technical day traders will only work with brokers that allow plug-ins or external programs to connect to their platform, or that offer a coding program within the platform itself to create indicators and autotrading programs.

Brokerage platforms such as TD Ameritrade and Interactive Brokers, for example, offer coding and autotrading capabilities. Institutional investors will typically have their own proprietary trading platforms that allow for autotrading through algorithmic programming.

Autotrading Strategies

Institutional investors may use complex algorithms that seek to place trades for investment portfolios based on defined criteria governed by a portfolio’s objective. This may include buying or selling securities automatically to maintain a specific percentage or dollar allocation to each stock, or matching the holdings in the portfolio to an index.

Technical day traders will use autotrading to invest based on technical market signals. They commonly use complex conditional orders for auto trading. These types of orders allow an investor to specify an entry price and build a collar around the trade to institute predetermined profit and loss levels for risk management.

Autotrading programs can be built to capitalize on developing trends, trade gaps, trade ranges, or scalp the bid/ask spread. There are countless strategies. Utilizing them is only limited by the trader's ability to come up with profitable strategies and effectively program them.

Autotrading is also popular for investors in the forex market. Most brokers offer a platform that comes equipped with the ability to install applications offered by other traders and businesses. A word of caution: the widespread use of autotrading in the forex market has led to an abundance of low quality, untested software. The field is littered with scammers.

Forex traders can also create their own trading programs by using MetaTrader 4 or MetaTrader 5 coding language called MQL4 and MQL5, for example.

Autotrading Strategy Criteria

Autotrading may sound simple, but programming even a simple trading strategy requires is complex. Rules need to be simple enough to be coded, and can't include subjectivity, as the computer needs defined rules.

Things to consider include, but are not limited to:

These topics are elaborated on in more detail below.

These are basic criteria to consider when making an automated trading program. The more complex the system, the more criteria and factors that need to be considered.