Algorithmic trading, also known as algo trading or automated trading, uses high-speed computers that are programmed to follow a specific set of instructions for the opening and closing of trades, based on strategies preset by the trader.
The software is designed to automatically alert traders and act whenever trading opportunities within the defined criteria occur.
Creating a trade plan is easier than sticking to it. That’s where a computer-programmed automated trading system can play a significant role. By removing feelings from trading, and executing set-ups based on a pre-defined plan, you’ll no longer let emotions lead to problems for taking profit too early, or cutting loss too late.
Automated systems spare you the problems of monitoring your screens all day while looking for new trading opportunities, and the doubts when to close a position. They also spare you the time needed to scan thousands of markets for one entry signal.
With the constant changes in market conditions it is hard to find a flawless strategy that can pass the test of time. That’s why it’s vital to refine your strategies from time to time, even when they are working well. A key metric to look out for in a successful trading system is the maximum drawdown (max loss from a peak to a trough of a portfolio). Remember that a 50% loss requires a 100% rise to make up for.
Backtesting is the way to test the effectiveness of a trading strategy using historical data before applying it for live trading. It’s all about probability. Finding the best strategy for a specific market can help maximise the probability for success.
The trading platform that is widely used around the whole world is MT5. A key feature of the MT5 platform is option to use Expert Advisors (EAs) – automated trading systems that can be downloaded and used. If you have programming skills you can also try writing your own EAs and test them on the MT5 platform.