Stock Market Trends...P1. What Is Automated Trading...P2. Advantages & Disadvantages...P3. Automated Trading Conclusion...P4

Transcription

1 I S SUE 1 VOLUME 1 YE AR 2013 Stock Market Trends...P1 What Is Automated Trading...P2 Advantages & Disadvantages...P3 Automated Trading Conclusion...P4

2 IS S UE 1 V O L UME 1 YEAR 2013 Automated stock trading Helping you achieve your financial goals Addressing the financial needs of middle-class investors One of the biggest trends in retail trading over the past decade has been the increase in popularity of automated stock trading. In this type of trading, buy and sell signals are generated by a trading system automatically executed by a platform, such as the CoolTrade robotic trader. This platform is a form of artificial intelligence that acts like a trading surrogate and connects to the trader s brokerage account. This allows for hands-free trading which enables faster execution, fewer errors and the ability to trade with high-frequency strategies. Traders and investors can create precise entry, exit and money management rules by utilizing the CoolTrade Strategy Wizard that allows computers to execute and monitor the trades. One of the biggest attractions of strategy automation is that it can take the emotion out of trading since trades are automatically placed once certain criteria are met. This article will introduce and explain some of the advantages and disadvantages, as well as the realities of automated trading systems. WHAT IS AN AUTOMATED TRADING SYSTEM? Automated trading systems, also referred to as mechanical, robotic trading, algorithmic trading, automated trading or system trading, allow traders to establish specific rules for both trade entries and exits that, once programmed, can be automatically executed via a computer. The trade entry and exit rules can be based on simple conditions such as a moving average crossover, or can be complicated strategies that can be built with our revolutionary point and click system.

3 Figure 1 A 10 day chart of Microsoft applying an automated strategy. You can see the automated trader selecting entry and exit positions based on a set of rules. The CoolTrade Strategy Wizard makes strategy building easy with its revolutionary point and click system. Set your preferences, create a watch list, set your open position rules and profit goals in just minutes. Select from a list of over 500 commonly used technical indicators to build a set of rules that can then be automatically applied. The user could establish, for example, that a long trade will be entered once 5-day SMA crosses above the 18-day moving average of a particular stock. You can build a simple strategy or a super sophisticated strategy with over 500 common indicators available. We find its better to keep it simple but you have the flexibility to do what you like. Once the entry rules have been established, the computer can monitor the markets to find buy or sell opportunities based on the trading strategy specifications. Depending on the specific rules, as soon as a trade is entered, any orders for protective stop losses, trailing stops and profit targets will automatically be generated. In fast moving markets, this instantaneous order entry can mean the difference between a small loss and a catastrophic loss in the event the trade moves against the trader. Advantages of Automated Trading Systems There is a long list of advantages to having a computer monitor the markets for trading opportunities and executing the trades including minimize emotions. Automated trading systems minimize emotions throughout the trading process. By keeping emotions in check, traders typically have an easier time sticking to the plan. Since trade orders are executed automatically once the trade rules have been met, traders will not be able to hesitate or question the trade. In addition to helping traders who are afraid to pull the trigger, automated trading can curb those who are apt to overtrade buying and selling at every perceived opportunity. Simulation Mode Allows you to test a strategy in real time and applies trading rules to live market data to determine the viability of the idea. When designing a system for automated trading, all rules need to be absolute,

4 There is no such thing as a trading plan that wins 100% of the time losses are a part of the game. But losses can be psychologically traumatizing, so a trader who has two or three losing trades in a row might decide to skip the next trade. If this next trade would have been a winner, the trader has already destroyed any expectancy the system had. Automated trading systems allow traders to achieve consistency by trading the plan. It s impossible to avoid disaster without trading rules. with no room for interpretation (the computer cannot make guesses it has to be told exactly what to do). Traders can take these precise sets of rules and test in simulation mode in real time before risking money in live trading. Careful forward testing allows traders to evaluate and fine-tune a trading idea, and to determine the system s expectancy the average amount that a trader can expect to win (or lose) per unit of risk. Preserve Discipline Because the trade rules are established and trade execution is performed automatically, discipline is preserved even in volatile markets. Discipline is often lost due to emotional factors such as fear of taking a loss, or the desire to eke out a little more profit from a trade. Automated trading helps ensure that discipline is maintained because the trading plan will be followed exactly. In addition, pilot-error is minimized, and an order to buy 100 shares will not be incorrectly entered as an order to sell 1,000 shares. Achieve Consistency One of the biggest challenges in trading is to first plan the trade and then trade the plan. Even if a trading plan has the potential to be profitable, traders who ignore the rules are altering any expectancy the system would have had. Improved Order Entry Speed Since computers respond immediately to changing market conditions, automated systems are able to generate orders as soon as trade criteria are met. Getting in or out of a trade a few seconds earlier can make a big difference in the trade s outcome. As soon as a position is entered, all other orders are automatically generated, including protective stop losses and profit targets. Markets can move quickly, and it is demoralizing to have a trade reach the profit target or blow past a stop loss level before the orders can even be entered. An automated trading system prevents this from happening. Stealth Mode The CoolTrade platform offers a proprietary feature called stealth mode hiding all of your orders until the robotic trader is ready to open or close a position. Stealth mode is a very powerful feature important in defending against other computers and professional traders that may trade against you. Diversify Trading The CoolTrade Robotic Trader empowers the user with the ability to run a long and short strategy simultaneously. This provides users with the option to hedge against losing positions. What would

5 be incredibly challenging for a human to accomplish is efficiently executed by a computer in a matter of milliseconds. The computer is able to scan for trading opportunities across a range of markets, generate orders, monitor trades and positions. Automated trading systems boast many advantages, but there are some pitfalls traders should be aware. Mechanical failures The theory behind automated trading makes it seem simple: set up the software, program the rules and watch it trade. In reality, however, automated trading is a sophisticated method of trading, yet not infallible. Depending on the trading platform, a trade order could reside on a computer and not a server. What that means is that if an Internet connection is lost an order might not be sent to the market. There could also be a discrepancy between the theoretical trades generated by the strategy and the order entry platform component that turns them into real trades. Most traders should expect a learning curve when using automated trading systems, and should begin in simulation mode while they refine their strategy. Monitoring Automated trading systems do require some monitoring. This is due do the potential for mechanical failures, such as connectivity issues, power losses or computer crashes, and to system quirks. It is possible for an automated trading system to experience anomalies that could result in errant orders, missing orders, or duplicate orders. If the system is occasionally monitored, these events can be identified and resolved quickly. techniques can create systems that look great on paper and perform terribly in a live market. Over-optimization refers to excessive curve-fitting that produces a trading plan that is unreliable in live trading. It is possible, for example, to tweak a strategy to achieve exceptional results on the historical data on which it was tested. Traders sometimes incorrectly assume that a trading plan should have close to 100% profitable trades or should never experience a drawdown to be a viable plan. As such, parameters can be adjusted to create a near perfect plan that completely fails as soon as it is applied to a live market. This over-optimization creates systems that look good on paper only. Server-Based Automation Traders will soon have the option to run CoolTrade through a cloud-based server for a fee, potentially providing faster order entries. Conclusion Automated stock trading is a great way to harness the power of computers that can monitor a tremendous amount of data and make split second decisions. According to Bloomberg over 70% of trades are now done by high speed computers so if you want to compete with computers you most likely will need a computer. Please contact our sales team for pricing specials and to see the CoolTrade robotic trader in action. Our sales team will send you a no obligation free demonstration. Over-optimization Though not specific to an automated trading system, traders who employ back-testing

6 Thank you for your interest in the CoolTrade platform. A sales associate will contact you soon to answer any questions you may have regarding this game changing technology.