What is a trading robot (automated trading)?

Illustration: What is a trading robot (automated trading)?

What is a trading robot (automated trading) ?

Trading robots are currently amazingly popular, and used on the Forex, with shares, or even for binary options trading. A trading robot is a software programme dedicated to trading. It places orders automatically, following signals indicating market trends. In other words, it is a trading tool based on a technical analysis of statistics available to actors on the stock market. The robot is operational 24/7 and can thus make investments for a trader who does not have to follow asset values constantly.

Trading robots: who can use them?

Trading robots are very popular with beginners and with people who do not want to spend time analysing market trends. Transactions based on algorithms defined upstream take place automatically and the system is very easy to use. This explains why even amateur traders who do not know anything about trading can use this tool easily and make profits. You do not even need to know much about computers to benefit from the system. All you have to do is follow instructions on how to start transactions.

Choosing a trading robot

Choosing your trading robot well is important and you must read terms of service thoroughly before using automated trading. Trading robots use one of two approaches to work: technical analysis or fundamental analysis:

Technical analysis basically means studying patterns in the fluctuation of a share price or a pair of currencies to identify which are easily predictable. A basic trading robot can decide to buy or sell when prices rise or fall for several hours straight. More advanced robots can take into account several hundred parameters from different viewpoints, from which no human being would be able to draw conclusions.

Fundamental analysis refers to two types of trading robots:

screening: the most commonly used in the financial sector. It is an extremely sophisticated filter which helps draw a limited shortlist of supposedly profitable investments based on the financial health of a company, its market value, and macroeconomic indicators.

publication of economic indicators potentially leading to major changes. Taking a market position as early as possible allows you to benefit from a newly published piece of information before its impact on prices can be determined.

The operating mechanism is thus the essential criteria for choosing your trading robot. Some use both technical and fundamental analysis for an even better performance.

Limitations of automated trading and precautions

In spite of the advantages of trading robots, not everyone agrees on their efficiency. Some think Forex robots simply follow instructions embedded in the software, which means decisions may turn out to be wrong when market conditions change. Robots cannot spontaneously adapt to a new environment without technical intervention. Human intervention is necessary to modify the software algorithm so it can function correctly. Though the inventors of automated trading continue to boast about the system and how it saves time and money, other stock market experts doubt any real gain can be had from their use.

In any case, you must understand how automated trading works in order to use it in a favourable environment. Some robots work better in a highly volatile environment while others need quiet markets. Settings are crucial, for example initially very strict micro-limits, a very low cap on positions, as well as stop orders to minimize risk if incorrect positions are held or if a technical problem occurs with the software.

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