What is System Trading? : NobleTrading Blog

Thursday, November 5, 2009

What is System Trading?

System trading, also known as mechanical trading, automated trading, algorithmic trading and rule based trading, is one of the two popular trading methods; the other is discretionary trading. It is the trading practice where a trading system trades on behalf of a trader. The system makes all trading decisions with respect to the rules set by the trader and the info available at the time. System traders rely on the ability of the system to find trading opportunities and to execute trades.

Usually all the trading decisions like entry and exit points, stop-losses and position sizes are made by the system, but it is possible to override the decisions. Most trading systems come with standard trading rules, which need to be customized according to the traders' trading goals, risk tolerance and the securities/markets traded. As all trades are done automatically, traders can practice complicated trading strategies.

The first thing to note is that the system makes absolute trading decisions. A buy or sell process is triggered once all the requirements are met; and the system never trades until the minimum requirements are met.
System trading eliminates human emotions like fear and greed from influencing the trading.
As the decisions are made automatically, traders can conduct large-scale trades with complex strategies like arbitrage.
The strategy is better for short-term trading like intraday trading and swing trading; but not for long-term trading and investing.
The strategy is good for persons who want speed and accuracy in their trades; and who want to save time.
System trading is usually less flexible and adaptable than discretionary trading.
While system trading favors novice traders more than discretionary trading, the system still requires to be fine-tuned for making good profits with minimum risk/loss.