Read about the evolution of trading systems started and the basic life cycle in an automated trading system in Part I and Part II.
How to build automated trading system?
Beginner traders can learn to build their own automated trading system with the algorithms to trade in the markets. For building your own automated trading system, you will need to code the strategy in a programming language, backtest the strategy on historical data to find out its performance, paper trade and then live trade.
Let us see these steps in detail below that can serve as a rough guideline for building an algorithmic trading strategy:
Step 1: Ideation or trading plan
Come up with a trading idea or a strategy for trading in live markets. This ideated strategy can be based on your market observations or can be borrowed from trading books, research papers, trading blogs, trading forums or any other source.
Step 2: Creating the system
This step requires you to create an automated system to identify the trading opportunities in the market in accordance with your preferred financial instruments. Also, you will need to feed the automated trading system with the information regarding how to perform once it finds the opportunities.
In addition, you will also need to give the inputs regarding risk management by entering the parameters such as stop loss, limit order etc.
This entire process of creating the automated system will require you to have the knowledge of a programming language such as Python, C, etc. With this programming language, you will be able to code the system with all the necessary abovementioned preferences.
Step 3: Test and refine your system
The next step is to test and refine the automated trading system so as to improvise the system in case of any malfunctions. After making any necessary changes or improvements, you can be sure that the system is set for taking your trades to the live market.
Step 4: Take your automated system live!
Once you’re sure of your automated system, you can take your trade live with your trading idea or strategy.
Now that you have successfully built an automated trading system, here is a tutorial to help you through the process of downloading historical stock data using Python. If you are interested in automated trading system and want to analyse historical stock data for developing your trading strategies, this video can serve the purpose. Visit QuantInsti to watch the video: https://blog.quantinsti.com/automated-trading-system/
Moving forward, we will discuss the advantages of automated trading systems.
Advantages of using automated trading systems
The advantages of using automated trading systems are as follows:
- Ease of use: Orders can be placed quickly with the help of the software navigating you through the different parameters. Moreover, your own automated system will make it even easier for you to place orders since it is always at your disposal.
- Live portfolio review and market updates: With the automated trading system, you can view market data of financial instruments such as shares, commodities, stock indices, etc anytime. You can also keep track of your portfolio, its underlying assets and performance with the software.
- Notification feature: One of the most advantageous features of the automated trading system is the notification feature. The automated system will send you alerts to notify you about the latest events in your portfolio as well as broker recommendations.
- Related news updates: Users can also track live updates on developments related to a particular stock or segment with the help of automated systems. The system helps you to be updated so as to modify your trade-related inputs such as the selection of financial instruments, updating of the stop loss value, limit value etc.
- Analysis and charts: Another feature is the provision of historical charts and analysis that allows you to look at previous indices data, and stock prices and provides analytical tools for the same.
Ahead, we will discuss some disadvantages of using automated trading systems.
Disadvantages of using automated trading systems
The following are the disadvantages.
- Expenses to use the automated system: The automated trading system comes with an expense and that may be a disadvantage for some who do not wish to invest in the same.
- Connectivity: A generic disadvantage of using the automated trading system is connectivity. In some remote regions, connectivity disturbances are common, and this may lead to losses during order placements.
Conclusion
This was a detailed post on automated trading system architecture to give you an in-depth and insightful knowledge of the components involved. Also, there are various challenges that the architecture developers need to handle or overcome in order to build a robust automated trading system. So what are you waiting for? Go Algo!!
If you want to learn various aspects of algorithmic trading and automated trading systems, then check out our course on “Algorithmic Trading for Beginners!”. This course builds a foundation in algorithmic trading and is perfect for those who want to get a complete picture of the domain. It includes the what, how and why of algorithmic trading. Different algorithmic trading strategies and regulations for setting up an algorithmic trading business are also included.
Originally posted on QuantInsti blog.
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This material is from QuantInsti and is being posted with its permission. The views expressed in this material are solely those of the author and/or QuantInsti and Interactive Brokers is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to buy or sell any security. It should not be construed as research or investment advice or a recommendation to buy, sell or hold any security or commodity. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.
