In fully automated trading, or system trading, traders develop specific rules for trade entries and exits that allow the computer to perform the order entry functions. Trade rules can vary from simple criteria, such as a moving average crossover, to complex custom strategies that require elegant programming. Automated trading requires software that is linked to a broker so that the signals can be automatically submitted and filled.
By comparison, discretionary traders make decisions based on current market conditions, using discretion (thus the name) to decide whether to enter/exit trades. Automated trading boasts a number of significant advantages over discretionary trading. Perhaps the most important advantage is that automation removes much of the emotion from trading. Once the system is set up, the platform handles all trade entries and exits, leaving the trader to follow the rules rather than second-guess or hesitate.
Another advantage is that automated trading eliminates the potential for costly pilot error mistakes. Unlike a discretionary trader who might accidentally hit the "buy" button instead of "sell," or who might enter 1000 shares instead of 100, the computer will not make mistakes as long as the system has been developed and programmed correctly.
Finally, automated trading enables levels of speed, precision and accuracy that many traders would find impossible in discretionary trading. All of these factors have made automated trading a popular option among individual and institutional traders.
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