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How to build Automated Trading System

It is a well known fact that 70% of the errors are due to human error and it is no different in trading using technical analysis. Today, we have automated trading systems (algo trading)in place for the complete trade execution ( identification and execution of the trades). In this article, I would like to touch upon the components required to be in place for creating automated trading system. we will talk about the processes that needs to be definitely automated to eliminate errors and also to take away the emotional aspect of trading such as fear and greed. In this post, we will cover

1.Daily Trading activities

2. What cannot be automated?

3. What can be automated?

4. Automation tools

Daily Trading Activities

1. Scan the markets

Get the direction of the markets for the day. A technical trader would always like to be aligned with the market to increase his probability for profitable trades. He would like to follow the news and understand how it is impacting the market. As a technical trader, he knows that news by itself is not important and is interested in how the market reacts to the news.

2. Scan for trades aligned with the market

Once he gets the pulse of the market direction, he would look for trades that are aligned with the market direction. if the market is bullish, he may look for trades that are in up trend and if the market is bearish, he may look for trades that are in down trend. Each trader has its own time frame based on the kind of trading he is involved in. Day trader usually use shorter time frames (1 min, 5 min, 15 min, 30 min, 4 hrs and Daily) where as swing trader uses higher time frames ( hourly, 4hrs, daily, weekly)

3. Determine the entry point for the trade

Once a trade is identified, he needs to identify an entry price using technical analysis where he could enter the trader to satisfy the risk reward ratio he set in his trading plan

4. Determine the targets and stop loss points for the trade

Targets and stop losses need to be determined for the trade based on support and resistances for the trade chosen.

5. Monitor Market trends

In addition, I personally would monitor for the market trends in the background while executing and following through the trades.

What cannot be automated

Today, with the advent of sophisticated trading tools and algorithmic trading, everything can be automated. However, If you are a beginner and have very less capital to start with, I would highly recommend to do the steps mentioned below manually to understand the nuances of the market.

1. I analyze the markets visually with charts and follow the impact of the news on the markets. In other words, I look at the charts visually to identify the support and resistances for markets ( $SPY, $QQQ, $IWM). I also follow the volatility ($VIX) to determine the trading direction to choose for the time frame considered

2. After determining the market direction, I pick trades from the list generated by scanners ( have scanners for bullish and bearish — will talk more about it in the next section) to execute on a given day based on RRR, ATR ( Average True Range) and sometimes news.

3. After executing the trade, I would prefer to execute stop loss manually rather than set stop losses. Markets can be very volatile some times during intra day, hit your stop loss criteria and bounce back. The best way to execute stop loss is to wait till the end of the day .

What can be automated

If you have a system in place, it can be automated. What is a system? System is a set of well defined processes that you use to scan, identify and execute the trades based on your RRR and position management. Today there are so many sophisticated trading tools available that allows you to automate most of the other trading activities.

1.Scan for trades

I get these questions from a lot of beginners — what should I trade? My reply would be- Do you have a trading strategy and a trading plan? I personally had lost a lot of money without having a trading strategy and a plan. If you are a beginner, I personally would recommend you to follow some one who is knowledgeable and has an automated scan for the trades that suit his trading strategy. In other words, he is able to automate his trading strategy that spits out the trades based on his time frame. A good trader would have scans for all the market conditions.

I am a big fan of Ichimoku and its principles to determine my bullish and bearish trades. I personally use TC2000 PCFs to automate the conditions for my strategy.

2. Identify support and resistances

For a trade, all you need is to identify the support and resistances. As I have mentioned in my breakout strategy stop loss, I love technical stop losses rather than hard stop loss. I enter the trade at a break out and use that as a support. But, how would I know my resistances? Apart from Ichimoku support and resistances, I would also like to use flat lines and trend lines to identify my support and resistances. Today, some tools automatically draw these lines for you. Also, they enable you to combine different time frames which would enable you to see the support and resistances for the trades.

3. Execute the trade

Let’s say , I am waiting for a trade to breakout and do not want to personally wait for the trade. Using my position management rules, I would nibble into the trade when it breaks out with my mental technical stop loss at breakout. If the trade continues my way, I can add more as per my position management rules.

Today, most of the trading platforms allow you to trades based on drawings on the chart. I would definitely take advantage of it ( Not many platforms support option trading based on the charts. You can trade based on the alerts created for option prices). we can create a buy or a sell order based on the conditions created to execute the order on the chart ( touch the line, bounce the line, break through the line).

4. Exit the trade

Finally, but not the least, is how can I get out of the trade automatically? it depends on your exit strategy. For example, When I am trading options, I would always enter a trade that could double. I would sell 1/2 at 100% , half of the remaining options at 150% and I would sell the rest based on the conditional order created for resistance identified. Other popular exit strategy for options would be to sell options at 50%, 75%, 100% ( sell every 25%). These exit orders can be automated in any trading platform. As far as stop losses are considered, I would like to handle it manually.

Automation Tools

There are so many tools available out there. I can talk about the tools I personally use. I have used multiple charting tools such as TC2000, Trend spider, Trading view and also have used multiple trading platforms such as Etrade, Ameritrade, WeBull.

I have used TC2000 the longest and love their PCF (personal criteria formulas) to create scanners. I also trade cryptos and wish they provided charts. They are very slow to adopt newer derivatives. However, they also have a trading platform and one can set orders directly on the charts. Their charting tool has more technical indicators than any other tool. Pricing wise, it is bit expensive around 110$ for the platinum version.

I started using Trading view and Trend spider to look at crypto charts. I like Trend spider better for their ease of drawing trend lines. Also, I like the ability to see support and resistances for multiple time frames. ( daily vs weekly). They have scanning ability but is limited compared to TC2000. I like Trend spider multiple charts view and charts look crisp when I post it on social media. I have only used the free version of Trading view and cannot comment much on it.

Most of the trading platforms have charting capabilities integrated today. I have been using Etrade, Ameritrade for a while and recently started using Webull. However, I personally like to use charting platforms for my research and scans as they have more sophisticated tools than the trading platforms.

Once you have the above components in place, you can also do your strategy or system testing using tools like Webull. They backtest the strategy with a large set of data that can validate the process. I will be writing a separate article on my backtesting experience in a separate post.

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