Automated Trading Systems Trading systems facilitate trader discipline. Computerized systems offer additional advantages. The speed and efficiency with which a computer identifies patterns and generates signals is one obvious advantage. Automated trading systems offer direction and suggestions about what to do in a given market and help limit the range of choices. This makes the trader’s task less overwhelming, because the possibilities and opportunities become more clearly defined.

Trading systems approach the market consistently and objectively. Rules are uniformly applied to defined market conditions. Trading systems are effective since rules are not the victims of trader judgment. The whimsical nature of a trader is diminished by a system.

The emotional aspect of trading can be significantly reduced as well since automated systems are void of emotion and judgment. Unfortunately, the emotional tendency of a trader is to outguess the system, even when its producing profitable trades. If a trader can discipline himself or herself to follow a system, with rigor, emotions will not rule the decision-making process. Trading systems are designed to think, not to feel. Another positive feature of trading systems is that they generally include money management rules which facilitate trading discipline.

While it is not guaranteed that past price patterns guarantee future price patterns, it is also not true that markets are random. Another argument against the use of trading systems is they define market behavior in limited ways when the market can; in fact, behave in an infinite number of ways.

Even though the criticism is valid in that systems do capture a very limited number of possibilities, this characteristic is also what makes automated trading systems useful. The ability to reduce information to observable patterns gives the trader some semblance of order and direction. Without this, many traders feel overwhelmed and directionless.

One of the more controversial techniques to develop from computerized trading is the concept of optimization. Optimization is a process by which data is repeatedly tested to find the best results. The best moving average size, point and figure method, or other parameters are made to fit the raw data. It is important to understand the methods of optimization and to provide proper precautions regarding optimized trading systems. Performed properly, extensive testing can reveal a great deal. However, excessive optimizing can be misleading, deceptive, and costly.

Trading systems give the trader a way to interpret, quantify, and classify market behavior. Automated trading systems define potential opportunity and provide specific trading signals. Following these signals can facilitate the development of trading skills as well as the discipline.

Automated trading systems have expanded the scope of traders. Systems can now be thoroughly backtested and perfected using the computer to test many if/then scenarios. Trading systems offer a way to define and categorize market behavior by reducing information to patterns and generating trading signals. While systems are without emotion, traders are not and often try to outguess a system. Misuse and lack of discipline are major causes of losses in trading systems. Develop a trading system that you believe in and can stick to because it will serve you very well in your trading business endeavor.

Happy Trading.


Jeff Neal 
Senior Writer, Options Strategist & Profit Strategies Radio Show Market Correspondent
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