The Role of Automated Trading Systems


Do you know that automated trading systems are capable of executing trades in less than a millisecond? In the fast-paced world of finance, automated systems are the trading superheroes. They're like financial wizards, using smart maths and high-tech tricks to make quick, precise, and smooth trades. Let's dive into what these trading systems do and why they're such a big deal in today's world of finance.

Introduction to Automated Trading Systems

Automated trading systems, also known as algo or algorithmic trading, are like tech-savvy assistants in the financial world. They don't need human input for each move; they follow specific rules set by a trader and execute trades when criteria are met. They focus on data analysis and risk management.

Evolution of Automated Trading Systems

Automation has totally changed the world of finance, shaking up how things happen in the markets. Here's a breakdown:

Back in the 1970s and 1980s, big traders started using algorithms, and electronic exchanges began to develop. Then, in the 1990s, they came up with algo trading, where computers used complex mathematics to execute trades.

The 2000s saw the rise of high-frequency trading (HFT) with fast trading tactics. In the 2010s, there were new rules that spread around the world. Now, in the present day, this tech is used all over the place, including in cryptocurrencies* and decentralised finance (DeFi). Additionally, traders use AI and machine learning to make automated trading more effective.

Do Automated Trading Systems Work?

Automated trading systems work if a trader understands the mechanics and develops an algorithm based on their risk tolerance, goals, and particular market conditions.

There are various trade strategies used in algo trading. Some common approaches include:

Trend Following:

Trend following uses different indicators to identify a trend and enter trades when market momentum is strong.

Mean Reversion:

This technique is about spotting when the market has moved significantly in one direction and waiting for it to return to its average. It looks for certain levels where prices may bounce back up or drop down.

Breakout Trading:

This strategy is about making trades when the market breaks out of the established price range, suggesting a change in its direction.


This strategy monitors various markets to detect instances where a price difference exists and executes trades to benefit from this.

Best Automated Trading Systems

Algo trading comes in various types, each designed to meet specific market objectives and conditions.

High-Frequency Trading (HFT)

HFT is characterised by ultra-fast order execution, often within milliseconds. It typically involves market-making and arbitrage strategies to benefit from small price discrepancies. Many financial institutions, hedge funds, and proprietary trading firms use automated stock trading systems to execute their trading strategies efficiently. For example, Virtu Financial is a leading HFT firm known for using sophisticated automated trading strategies to provide liquidity to the markets. The company trades across a wide range of asset classes, including equities, options, and fixed income.

Market Making

Market making provides liquidity to markets by continuously quoting bid and ask prices. These systems aim to profit from the spread between these prices.

Statistical Arbitrage

These structures identify and exploit price discrepancies between related assets or markets based on statistical analysis to determine entry and exit points.

Options and Derivatives

These systems are designed to trade options and derivatives. Strategies can include complex options spreads, volatility trading, and delta-neutral hedging.

Key Components and Architecture of Automated Trading

The key components and architecture typically include:

Data Feed

Algo trading is based on both current and past market data. The data include things like price updates, order book information, and the latest news.

Strategy Engine

This part houses the rules of when and how to execute trades. These rules can take cues from different things, such as looking at charts, digging into a company's financial health, gauging market sentiment, or using mathematical wizardry.

Execution Layer

The system creates orders according to its strategies and shoots them off to the right exchange or broker for execution, considering the time and fees involved.


Automated trading systems typically run on high-performance servers and utilise robust systems to ensure low-latency execution. A reliable and fast internet connection is crucial to minimise latency in order execution.

Risk Management

The system determines the appropriate size of a position based on predefined risk management rules. It implements stop-loss orders to limit risks.

Backtesting and Simulation

The system uses historical market data to test and optimise trading strategies. Backtesting allows traders to simulate how a strategy would have performed in the past to assess its potential profitability and risk.

Advantages and Limitations of Automated Trading Systems

Automated trading systems have advantages and limitations. As a trader, you must understand the various merits and constraints. Here are a few:

Advantages of Automated Trading Systems

  • Increased Speed and Efficiency. Algorithms can place trades easily. They respond to what's happening in the market right away, without anyone having to step in and do it by hand. This means trades happen quickly, and you don't have to worry about orders getting delayed.
  • Backtesting and Optimisation. Computer codes and software enable traders to test strategies with past data. This helps traders see how well their strategies would have worked in different market conditions.
  • Diversification. Computer programs can keep an eye on lots of different markets and assets at the same time. This lets traders spread their strategies and hedge risks.

Limitations of Automated Trading Systems

  • Technical Issues and System Failures. Automated trading systems rely on technology, where technical glitches or system failures can occur.
  • Over-Optimisation. Traders may fall into the trap of over-optimising their strategies based on historical data, which can lead to losing trades.
  • Limited Adaptability. Digital trading clones are designed to operate based on predefined rules and parameters.

It is crucial for traders to thoroughly test and validate their trading rules before investing. FXOpen's TickTrader offers traders a reliable platform to gain trading experience and test strategies.


Auto trading has changed the trading world. It is fast, makes fewer mistakes, and doesn't let emotions get in the way. These systems are like having a tireless assistant who can work around the clock, helping you spot good opportunities and keeping your own emotions out of it. While they're not a surefire way to make money, if you use them right and keep an eye on them, they can make your trading smoother. If you want to test automated systems or trade yourself, you can open an FXOpen account.

At FXOpen, automated trading is available only for clients at FXOpen International.

*At FXOpen UK and FXOpen AU, Cryptocurrency CFDs are only available for trading by those clients categorised as Professional clients under FCA Rules and Professional clients under ASIC Rules, respectively. They are not available for trading by Retail clients.

This article represents the opinion of the Companies operating under the FXOpen brand only. It is not to be construed as an offer, solicitation, or recommendation with respect to products and services provided by the Companies operating under the FXOpen brand, nor is it to be considered financial advice.

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