A trading system is a set of rules and parameters that is used to determine the entry and exit points for
buying and selling securities, and some cases also futures. Trading systems that use a computer software program are called
automated trading systems. The use of such trading systems has intensified with the continuous growth in the volume of trade
worldwide.
A trading system helps to deploy complex strategies easily. It is used for entering trading orders and their various aspects
such as timing, quantity and pricing. Trading systems facilitate the management of market impact and risks involved, and the
determination of opportunity cost.
How does a Trading System Work?
A trading system is a complex interface comprising data, software, design and decision making processes. These systems conduct
technical analysis using oscillators and moving averages to evaluate information for forecasting future prices. Relevant and
reliable historical data is used for back-resting of trading systems. This makes it more effective to ensure profit earnings in
any market condition. Trading systems must be optimized regularly so that they compute properly.
Advantages of a Trading System
- An automated trading system saves a lot of time for a trader, as computers do most of the actual trading and analysis.
- As human emotions often effect trading adversely, adopting a trading system cuts down this factor. Every order that is placed
is based only on market data where the equity or futures is traded. Trading systems do not deviate from this pattern of
functioning.
- Buying the services of a trading system lessens the work load on traders.
Disadvantages of a Trading System
- Before a trading system is brought into use, it has to go through lot of testing which means it involves considerable time
and effort.
- The simulated results differ from the actual results to a great extent. This ‘slippage’ is one of the major problems of a
trading system.
- Most trading systems are complex. They require the user to develop a thorough understanding of the parameters on which the
technical analysis is based.
Traders can build their trading systems themselves. They can also opt to buy or lease trading systems that are developed by
vendors. Whatever option is preferred, it is important to access reliable data generated by trading systems in order to understand
market conditions.