Can you automate stock trading

Automated trading - advantages and disadvantages

Automated trading refers to algorithm-based trading using computers. How exactly does it work and what are the chances of success?

Automated trading in day trading? Admittedly, I wasn't a fan of computer trading and so-called Expert Advisores for a long time. My mentors at the time didn't think much of it and so I adopted this attitude without really questioning this view critically. If you want to be a successful trader, you have to master the chart yourself, right?

Yes and no. Because, as is well known, many roads lead to Rome and so there are many different trading setups and approaches that are sustainably profitable. There are also strategies in automated trading that are successful. Uwe Wagner has published the statistics for an algorithmic trading setup in a comprehensive article and, as a former Deutsche Bank trader, writes that large investment banks in particular rely on algo trading.

Statistics from Eurex say that around 30% of total turnover is generated by automated trading and that this share is growing by around 20% annually. How automated trading works and how you can also use it as a private trader will now be explained below.


What is automated trading?

Automated trading enables trading in securities or derivatives through computer programs. The trader no longer presses the buy button himself, but leaves the order to his computer. He always has the opportunity to intervene in the trade himself, but theoretically does not have to.

The trader gives the computer an order when and how to open or close a trade. The computer forwards the order to the broker and the broker executes the order. The advantage is that this code only has to be written once and not for each subsequent order. The logic of the algorithms is constantly evolving. Today there are computer programs that generate their own trading ideas and then implement them at lightning speed. Another example are algorithms that search for current news or trends using common search engines and generate buy or sell orders for a stock, forex pair or index that matches this topic.

As with manual trading, once you have found a functioning, codable strategy, you have the opportunity to generate sustainable profits.

With automated trading, we have only described one main topic so far, which can be broken down into different categories (e.g. high frequency trading). We will now devote ourselves specifically to the possibility of simple algo trading for private traders.


What can an algorithmic strategy look like?

A algorithm is the unambiguous, executable sequence of statements of finite length for solving a problem. In principle, an algorithm is a logical sequence of given commands. In CFD or future trading, the command could be, for example: "If the DAX is trading below the previous day's closing price at 10:00 am, then open a short position". In this example, the computer would execute exactly one order every day. In the next step, you would have to add a line to the code that commands the closing of the trade, e.g. if book loss is -20 points, then close the trade (stop loss). If book profit +20 points, then close the trade (Take Profit).

With this simple strategy, the computer would now check every day at 10:00 a.m. to see if it should execute the command or not. He does this until the trade feeds him new commands or the account balance no longer allows a trade because the strategy was not profitable.


What are the disadvantages of automated trading?

Computers keep getting smarter. Research is being carried out at full speed on various forms of artificial intelligence, and intelligent machines are also used in trading. In addition to all the intelligence and discipline that a computer can bring, one must also note that a certain inaccuracy in trading makes sense. This inaccuracy cannot be handled at all or only to a limited extent by a computer.

Furthermore, errors are not always recognized immediately. If a trader is not at the trading desk and the computer orders incorrectly, it will continue to do so until the order is canceled or corrected. Such uncertainties can destroy the account.

In addition to the (calculable) disadvantages, there are also a number of advantages.


What are the advantages of automated trading?

Granted, the example just shown is really no reason to have this simple trading decision made by a computer. You could look at the chart yourself every trading day at 10:00 a.m. and decide whether to make the trade or not.

But with that we have already arrived at the first advantage of automated trading. The trader can reconsider his decision to place a trade at any time and make an emotional decision. If the trades have already ended with a loss for 3 days in a row, some traders will doubt the set parameters and distrust their own setup. Marks set (SL and TP) are offset to prevent fishing off, or the short is turned into a long trade because super-indicator XYZ suddenly predicts a long scenario. Man is fundamentally weak in spirit and as we all know, the stock market punishes this mercilessly.

Unlike humans, a computer doesn't know any Emotions. He stubbornly and stupidly follows the order he receives. This gives him an enormous advantage in trading.

Another advantage is the potential recreational value for the trader. If I don't have to sit in front of the screen all the time, but let someone else trade according to my ideas, I can time use it sensibly for other projects or leisure activities. And what is particularly chic is that I don't even have to pay this "assistant" a salary :)

Furthermore, you can incorporate all the indicators that are dear to you in the strategy. Overall, any number of constraints can be written, but the basic idea of ​​trading also counts here: Keep it simple, stupid.

Another positive thing is that every strategy can be checked against historical data on a demo account before using your own money. If you want to have a strategy tested, you first need someone to write the code for you (unless you are a programmer yourself). You can simply hire a service provider for this.

The next step is to open an account or demo account with a broker of your choice. Make sure that this broker offers software that allows you to backtest strategies. This works, for example, with brokers who offer Meta Trader 4 or Meta Trader 5. The Meta Trader is an ingenious, free trading platform with which you can trade fully automatically, semi-automatically or manually with many connected brokers.

With trading brokers you can first get to know the platform using a free demo account and of course backtest the strategies.


How can I review a strategy?

It is particularly gratifying that every strategy you design can be checked using historical data (backtesting). Although this is no guarantee for the future, markets generally behave according to the same pattern, consisting of trendy and non-trending phases with high or low volatility. This gives you an initial idea of ​​whether your trading plan can work or not.

In the Meta Trader you can have it tested retrospectively for about 5 years (depending on the broker) and according to our research so far, not only opening and closing prices are shown there, but every tick! So there is a lot of data that has to be evaluated. There is also the option of buying and importing historical data.

You also have to pay attention to the integration of the spread that the broker sets when backtesting. Depending on the strategy, 10-20 trades per day can quickly be made, with the broker calculating the spread each time. Even if he only calculates 1 point for the DAX, for example, this one point can significantly influence the result. Fortunately, the spread is automatically calculated for Activ Trades.

If you have included the spread in the result of the backtesting, pay attention to the payment of the flat tax. If you are trading with a broer who does not automatically withhold the tax, it must be deducted from the result at the end of the year.

Finally, it is advisable to examine individual, shorter periods in addition to a long period. All market phases should be tested once in order to achieve the highest possible level of security.

Last important note:

We noticed that although a written code is properly implemented in backtesting and delivers precise results, it does not implement all commands in live trading. It is possible that a stop loss is not followed up or the take profit is not executed. Be careful and test, test, test before you start with real money.



Automated trading is used by both institutional investors and private traders. Since it is well known that 90% of traders lose money permanently and this fact must be attributed to the lack of discipline, emotional actions, the greatest advantage of automated trading is certainly the factor Lack of emotion of the computer. Anyone who has designed an idea for a strategy must program this idea themselves or with the help of service providers. This code can then be checked with the help of (free) trading platforms such as Metatrader.

Automated trading does not mean that you are at the mercy of the computer for better or for worse, as you always have the option to intervene. Nor does it mean that a strategy that works today will still work next year. Markets change over time and this should always be taken into account.


Have you already had experience with automated trading that makes a useful addition to this article? Then we look forward to your tips and suggestions in the comment field!


P.S: Would you like to start automated trading? Then we recommend the starter box from Algo-Camp.