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What is Autotrading? | Series, Part 1 of 3

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At stockbrokers.com we like to do a short series occasionally a fast-growing area inside the online brokerage world that some investors might not know much about. Autotrading is a fairly new concept in the world of securities trading, and only a few online brokerages offer the ability to use autotrading inside your account. In the next few years, I fully expect more online brokers to move to offering autotrading programs and functionality as the demand for such features continues to increase. What exactly is autotrading? How did autotrading get its start? What are the primary uses of autotrading for the average investor? Let’s take a closer look at all of these questions.

Autotrading Defined

Autotrading is best defined as a trading strategy where buy and sell orders are entered automatically based on an underlying investment system or program. In order for a trade to take place a certain set of criteria must be met. The most common types of criteria used by investors in this area are technical indicators and price movements. Rarely do you see a fundamentals investor using an autotrading service, but investors who trade based on technical patterns use this feature quite frequently.

The History of Autotrading

Autotrading got its start in the FOREX markets. There are now numerous competing autotrading systems that are used by FOREX traders on a regular basis. Traders in the FOREX markets began to see the huge benefits associated with automated trading systems, and in the past few years autotrading has begun to creep into other markets. Options traders frequently use autotrading to set buy and sell points based on specified price movements. The futures market has seen increased action from traders in general as commodities have skyrocketed over the past few years. Some commentators have even speculated that autotrading programs could be partly to blame for the meteroric rise in oil prices. Investors in the stock market have been a little slower to embrace autotrading systems, but recently they have taken hold because of their ability to incorporate newsletter recommendations.

The Primary Use of Autotrading for the Average Investor- Investment Newsletters

What has brought autotrading to the average equity investor? The functionality to sync a particular investment newseletter to your individual online brokerage account. Online brokers who have autotrading features have established relationships with various investment newsletters. Investors who wish to directly follow the advice of a newsletter will then sign an agreement with his or her online broker to start the autotrading through investment newsletters process. This agreement says that you will allow the investment newsletter to directly send trading instructions and execute trades inside your account without receiving your permission each time. It should be noted that there are obviously some large risks associated with allowing someone else to trade in your account without consulting you each time. Make sure you research the investment professionals at that particular newsletter very well before ever signing an autotrading agreement that allows them to direct the trades inside your account.

With the popularity of autotrading, it certainly seems it is here to stay as investment option. Stay tuned with stockbrokers.com for the next autotrading article where we’ll examine which online brokers offer autotrading in part of of this three part series.

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