Automatic Execution

DEFINITION of 'Automatic Execution'

Automatic execution is a method for executing trades without imputing them manually. Automated systems allow foreign exchange traders to take advantage of trading signals to buy or sell an asset anytime day or night. Orders can be completed automatically based on a wide variety of technical indicators and trading systems. These automated systems can be designed based on a wide range of signals for triggering buy or sell orders without the need for manually monitoring and executing trades.

BREAKING DOWN 'Automatic Execution'

​​​​​​​Automatic execution has become commonplace as trading systems continue to grow more sophisticated and complex. Because foreign exchange (FX) markets trade 24 hours a day, these automated algorithms may help ensure a trader does not miss out on profitable opportunities. The triggering of specific signals from a variety of technical indicators, such as those based on price, volume and other criteria can help the trader.

Automatic execution allows the trading of orders or large numbers of simultaneous orders rapidly. This system enters and fills orders, even if the opportunity happens during regular business hours. As forex markets grow in volume and impactful news circulates more quickly, manual trading can be slow, prone to error, and costly to firms, especially in a fast market. A fast market is one experiencing unusually high levels of volatility, combined with unusually heavy trading. Often these fast market will trigger circuit breakers which will stop or limit market trading. Circuit breakers temporarily halt trading on an exchange or in individual securities when prices hit pre-defined tripwires.

Disruption from Automatic Execution

While automated execution can help traders profit from short windows of opportunity, they may also be disruptive. Because automated trades can execute so rapidly, markets can be subject to severe disruptions and anomalies. Market disruption is a situation where markets cease to function conventionally, typically characterized by rapid and substantial market declines.

For example, on May 6, 2010, the Dow Jones Industrial Average (DJIA) declined approximately 9 percent in just ten minutes. Many automated systems stopped out of trades, and yet, the market erased a large part of that decline before it closed. This disruption became known as the 2010 Flash Crash and is believed to have been caused to a great extent by automatic execution.

Setting Up Automatic Trading

Automated systems allow a wide variety of trading techniques. Most traders use a combination of several indicators, technical and fundamental analysis. Various types of chart patterns, trading price and volume, and other limits can be set up to trigger the opening and closing of positions. Detailed and intricate strategies can be defined based on technical analysis, and then programmed to be deployed automatically based on these different indicators. 

However, although technical analysis is easily automated, traders must be careful when deploying these systems. Technical indicators may not be valid if fundamental conditions suddenly change. Some common fundamental analysis ratios include the debt-to-equity ratio, financial leverage, and the price-to-earnings (P/E) ratio. For example, when events happen which may warrant avoiding trading in a specific market, automated orders will still be processed without human intervention,

A few of the possible automatic execution settings include:  

  • Limit order is a execute a buy or sell transaction at a set number of shares and a specified limit price or better.
  • Stop loss order designed to limit an investor’s loss on a position in a security and can work with short and long positions or holdings.
  • Fibonacci ratios include retracements, arcs, and fans which traders may use to look for confirmation of other technical analysis.
  • Elliott wave patterns to investigate the probability of a future direction in the market.
  • Stochastic oscillators are momentum indicators which compare the closing price to the range of prices over a period.