As financial markets increasingly become automated, novice traders may feel overwhelmed about how to approach the trading process. In this article, we cover the basics of automated trading platforms along with strategies for novices to capitalize on algorithmic trading.
An automated trading platform is a system that uses a computer program to conduct a variety of trades in a manner that requires minimal to no user intervention. It orders, executes, and manages trades with its automated protocols. To put it simply, automated trading systems utilize algorithms to process market data and determine the most reasonable and strategic trades for the user. The user can monitor the program’s performance, make any required adjustments, and input instructions.
Advantages of automated trading are numerous. For one, transactions can be concluded quickly and efficiently. Speed, accuracy, and reliability of automated trading systems also make it preferential to manual trading processes. Furthermore, engaging in algorithmic trading can help traders build a diversified portfolio, reduce overhead costs and unnecessary risks, and allow for reduced latency.
In order to utilize automated trading platforms, novice traders must first choose which type of platform to use. Generally, traders use either a “Buy-Side” platform, or a “Sell-Side” platform. While “Buy-Side” platforms are utilized by investors to purchase securities from broker-dealers, “Sell-Side” platforms are used to facilitate bids and facilitate trades.
Once a suitable platform is chosen, traders need to develop an algorithmic strategy that suits their individual investments. Two of the more common strategies known as scalping and swing trading can be beneficial for novice traders hoping to take advantage of the automated platforms.
Scalping is a trading strategy whereby a position is opened, exited and then closed in a very brief period of time, usually within the same day. This allows traders to take advantage of small price changes in a security over a short period of time. Advantageously, scalping will require less capital to start and can still be profitable despite the small profit margins.
Swing trading, on the other hand, is a strategy where traders look to capitalize on price fluctuations over a few days or weeks. As opposed to scalping, swing trading requires patience and often requires a greater capital investment. However, it also holds the prospect of larger returns.
Finally, after the selection of a platform, algorithmic strategy, and capital, novice traders should next create a backtest for the algorithmic strategies. A backtest is important to run algorithmic strategies through the process of their trading data in order to obtain an understanding of how the strategies would have played out in a real-world situation. This gives traders an idea of the performance of the strategies and helps them determine the most promising areas to focus on before executing trades through the automated system.
Ultimately, the automated trading platform is an invaluable tool for novice traders to build upon their knowledge and develop an effective and efficient trading strategy. With enough research and practice, new traders can take advantage of algorithmic trades to maximize gains and reduce losses, allowing them to realize their trading goals and objectives.