Automated Trading Systems: How They Work

Automated trading systems have undergone some evolution since they were introduced in the mid-2000s. Most people think of forex robots or expert advisors when a mention is made of automated trading systems. However, the definition of automated trading systems now goes beyond the use of personal forex robots. These systems have been modified to serve other uses in the forex market, as this article will show.

What is an Automated Trading System?

Automated trading systems can be defined as a set of software which can be used to control how trades are generated, transmitted and executed in the forex market. This definition definitely goes far beyond the concept of forex robots or expert advisors. The process of trading involves the following:

  • Generation of an entry trade order at the trader’s computer/trade station (could be a desktop, laptop, smartphone or tablet device).
  • Transmission of the trade order to the market maker or the ECN broker’s matching engines.
  • Transmission of the orders from the matching engines to the execution venues.
  • Generation of an exit trade order which passes through the same process to complete the trade cycle.

There is a lot that goes into the entire process, even though it takes a few seconds (or milliseconds in high frequency trading setups) to complete. How can automated trading systems be deployed in the entire process?

How Today’s Automated Trading Systems are Deployed

a) Personalized Trading with a Forex VPS

If you are still trading forex the old way, then you need to change. Forex Virtual Private Servers (forex VPS) have been created for a reason: to provide continuous, uninterrupted trading on forex accounts that have been plugged into the remote connection. The simplest systems allow traders to link their trading stations to the remote computer offered by the forex VPS provider, with tutorials provided to enable seamless integration and operation of the system. A more advanced setup involves the use of exchange-provided co-location facilities, which are expressly meant to ensure that the automated trading systems operate at speeds that can reduce latency and provide faster executions.

b) Copy Trade Systems

A model of forex social service as well as a type of forex signals service relies heavily on trade replication from master accounts to so-called slave accounts. These are basically known as copy trade services. Copy trade services are built on the use of automated trading systems, plugged in from the back end of the solution. The back end of a copy trade service solution features the experienced trader/signals provider, who uses an automated trade system to replicate the trades that are engineered at the back end of the software. The trades are then transmitted to all accounts that are linked to the trading engine, with a delay of a few milliseconds.

Installation of Local Trade Copier EA on Master Account and  Integration on Slave accounts

Installation of Local Trade Copier EA on Master Account and
Integration on Slave accounts ©

Every aspect of the trade process must be programmed into the copying engine. Typically, the automated trading system is plugged into a forex virtual private server (forex VPS) to ensure continuous operation. This is key as such software typically has to serve clients from different time zones. Downtimes occurring when the operators of the copy trade systems are asleep in their time zone should not mean that other clients who are in their business hours at this time should suffer.

c) Signals Services

As a form of spin-off from the copy trade system, signals services can also be delivered to clients using automated trading systems as opposed to manual systems of analysis and trade alerts. If a provider has a good strategy which has been well programmed, an automated trading system can be used to do all the hard work while the provider attends to other matters.

Various modifications to this system are now possible. For instance, it is possible to provide a system where the automated trading systems can generate signals and immediately deliver notifications about this, either using desktop notifications or via push notifications to hand-held mobile devices. Using this methodology, an all-round system that is independent of human interference can be developed and used by skilled forex traders to make side income. This system can be deployed for signals generation as part of a trade signals service, or can even be used as part of PAMM account services.

d) Strategy Testing and Development

One of the impact areas that have developed out of the use of automated trading systems is the area of strategy development, testing and optimization. There are those traders who would want to have manual trading methods strategically coded into automated trading systems, have them tested and properly optimized for use in the markets. The new MT5 trading platform has recognized the increasing role of strategy developers and testers. This is why Metaquotes Inc has created a self-creation system for traders within the IDE, where traders irrespective of experience level can use the simple tools on the MT5 IDE to create their own automated trading systems. Programs such as StrategyQuant have been developed and are becoming ever more popular by the day.

d)	Strategy Testing and Development

e) Order Management on Electronic Communication Networks (ECN)

It is not only in personalized retail trading that automated trading systems are used. They are also used with increased complexity in the smart money end of the market. Trading exchanges, institutional trading firms, liquidity providers, hedge fund operators and asset managers are increasingly using all manner of automated trading systems for their day-to-day operations. Pre-trade controls as well as order management is vital in ensuring efficient and cost-effective execution of orders. Automated trading systems in these cases function as part of Execution Management Systems (EMS). These are the functions of an EMS:

  • Preventing inadvertent order placement or other market activity as a result of unauthorized access or other system shortfalls. Such controls can be exerted at several points in the pathway: at the trading station, matching engine or execution point.
  • Stipulate caps on trade sizes with respect to available trading capital.
  • Set risk tolerance by implementing a “circuit-breaker” or kill switch mechanism to switch off order submissions if capital that exceeds the allowable risk is about to be used.
  • Pass orders to various execution venues so as to avoid causing market shift and loss of anonymity in trading.

Furthermore, automated trading systems may also be used for post-trade analysis. Metrics covered by post-trade analysis include the following:

  • Drop copy reconciliation, where the trader’s trade executions on a trading venue is documented in real-time and provides extra information on trading activity. Drop copies also serve as tools for trade activity reconciliation.
  • Post-trade credit controls


The ever-expanding use of automated trading systems is what has been covered in this article. It can be seen that automated trading systems are not only used for buying and selling assets, they can be used to create and manage a significant number of market process at trader level, broker level and even at the level of the execution venues. While professional traders are abreast with these uses, retail traders are hardly aware of them. It is hoped that this article has shed some light on the possibilities that automated trading systems can offer this group of traders.

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