What is Autotrading?

John Lister

Autotrading is a system by which an investor's money is used to automatically buy or sell a financial product based on a fixed set of conditions. It means that the investor does not have to issue individual orders for each transaction. This can minimize the amount of attention they have to pay to their investments and may lower financial advice costs. Somebody choosing to use autotrading needs to investigate the investment company very carefully before committing.

Man climbing a rope
Man climbing a rope

Most investors in a market use one of two main ways to organize their trades. One is to take complete control, making their own decisions about when to buy and sell. This means their broker simply acts on instructions, sometimes known as execution trading. A second method is to use a manager who makes decisions on the investor's behalf about when to buy and sell, often working on a commission of the profits. Usually this is done by the investor putting money into what is known as a managed fund.

Autotrading is a third, and less common, method. It effectively takes out the need for individual decisions about when to trade by either the investor or fund manager. Instead, the investor simply chooses which computer system to use to decide the timing of trades. This could be as simple as choosing the increased price at which they want to sell and the decreased price at which they want to cut their losses and sell.

In most cases, however, autotrading uses one of two strategies. One is known as fully automated, in which the computer makes all the decisions, based on a set system. The second is known as signal-based autotrading. In this system, the computer will follow the lead of selected human traders. The theory is that it can automatically track and follow their successful strategies.

There are some significant advantages to autotrading. One is that the computer system is able to closely monitor and assess more market data than a human and respond more quickly when it identifies the "right" time to buy or sell. Another is that it is theoretically more rational and less likely to make decisions based on short-term emotions such as panic.

Autotrading is only as good as the system being used. It is also an area that is arguably particularly vulnerable to scams. This is because the investor gives up a great deal of control into what happens to their money. The Securities and Exchange Commission recommends potential investors check very carefully into any autotrading firm they are thinking of using. In particular, it says investors should watch out for "cherry picked" results which detail previous successes but omit to mention past failures.

You might also Like

Readers Also Love

Discuss this Article

Post your comments
Forgot password?