The article “Automated Trading System and Interactive Brokers” was originally posted on IBridgePy blog.
The author of this article and the open source package IBridgePy are not affiliated with Interactive Brokers.
What Is an Automated Trading System?
An automated trading system is a computerized method that enables traders to execute trades automatically based on predefined rules and algorithms. An automated trading system eliminates emotional decision-making and improves execution speed. These systems, also known as algorithmic trading platforms, allow traders to establish specific criteria for both trade entries and exits, which are then executed by computer programs without manual intervention. By leveraging technologies like Python for stock trading, traders can implement sophisticated strategies that respond instantly to market conditions.
In order to prevent the effects of human emotion on their strategies and decisions, traders and investors turn entry, exit, and money management rules into automated trading systems that enable computers to execute and monitor the trades. You can develop entry and exit rules based on simple conditions, or you can employ difficult strategies that require skills in a programming language such as Python. Learn more at Python.org.
How Automated Trading Systems Work
All automated systems need software linked to direct access brokers. The TradeStation platform, for example, uses an easy programming language like Python. Some trading platforms offer strategy-building wizards that help investors choose possible technical indicators to develop a set of rules to automatically trade. For example, the user has the ability to develop a long position trade that will be entered when the 50-day moving average crosses above the 200-day moving average on a five-minute chart of a particular trading instrument. The trader may also input the type of order when the trade is triggered or use the platform’s default inputs.
Advantages of Automated Trading
Automated trading systems have certain advantages, which are as follows:
Minimizing Emotional Influence
There is no doubt that human beings make their decisions under the shadow of emotions, which results in losses in trading. However, an automated trading system decreases the involvement of emotions in the decision. The automation of the trading system results in the execution of the orders without any emotional effect.
Backtesting Strategies
When a trader wants to evaluate a trading strategy, he backtests it to ensure that it will give positive results. Backtesting is when a trader uses historical data and employs his strategy to see what the outcome would be if he used it in the past. Learn more about backtesting strategies to improve your trading performance.
Eliminating Guesswork
If you use an automated system, you should not leave any type of misconception. The computer is a machine that cannot make guesses.
Maintaining Discipline in Volatile Markets
Your system may be preserved in volatile markets. The traders have two big problems: they fear taking a loss and desire to get a little more profit from the trade. Automated trading creates discipline and does not permit one to make decisions without thinking.
Conclusion
In summary, an automated trading system provides a solution to the problem of emotions. It prevents mismanagement and appreciates trading with discipline. In addition, it performs risk management to stop losses. Another important characteristic is that it provides the opportunity to do a backtest.
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This material is from IBridgePy and is being posted with its permission. The views expressed in this material are solely those of the author and/or IBridgePy 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.
Disclosure: API Examples Discussed
Throughout the lesson, please keep in mind that the examples discussed are purely for technical demonstration purposes, and do not constitute investment advice, an investment recommendation or investment research. Also, it is important to remember that placing trades in a paper account is recommended before any live trading.
Disclosure: Order Types / TWS
The order types available through Interactive Brokers Trader Workstation are designed to help you limit your loss and/or lock in a profit. Market conditions and other factors may affect execution. In general, orders guarantee a fill or guarantee a price, but not both. In extreme market conditions, an order may either be executed at a different price than anticipated or may not be filled in the marketplace.
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