With the increasing use of trading bots in the stock market, it’s not unusual for conservative equity traders to question the hype around them. Stock trading bots (a.k.a. Automated Trading Systems or ATS) have their benefits, but are they profitable enough?
Stock trading bots are profitable, but like human stock traders, they are not immune to losses. They “act” according to the programming and strategies of the traders who use them. So, if your trading strategy is profitable, your trading bot should be too.
In this article, you’ll learn what stock trading bots are and how you can use them. I’ll also highlight the main qualities that make them profitable.
What Are Stock Trading Bots?
Unless you’ve been living under a rock, you’ve probably noticed that automation is on the rise lately. Since human traders rely on mountains of data to make on-the-fly buy or sell decisions, stock trading bots can theoretically make things easier and reduce the chances of error. But what are stock trading bots, exactly?
Stock trading bots are automated systems that monitor the stock market to perform trading actions. They run with machine programs and require little or no effort to operate once they are set up. They can be programmed based on an equity trader’s unique strategy, which may or may not be profitable.
Some of the tasks stock trading bots perform automatically include:
- Opening new orders: The stock trading bot does this when the stock market moves in a favorable direction based on your analysis.
- Closing open trades: The stock trading bot closes trades whenever the charts move in an unfavorable direction.
- Setting stop losses and trailing stops: This way, the bot prevents potential losses from blowing up your brokerage account.
- Setting profit targets: If a trade meets a predicted target, the stock trading bot closes it.
Tips on Using Stock Trading Bots
If you’re interested in using stock trading bots, here are a few options you can consider.
Let a Programmer Help You Out
If you want to build a custom stock trading bot, it’s best to let a programmer help you. The programmer will first analyze your stock exchange platform to understand its programming language. For example, the Thinkorswim platform uses ThinkScript.
After understanding your platform’s language, the programmer will build the automated system’s codes according to your “strategy rules.” They can be as simple as the cross of a Tenkan-sen and Kijun-sen Ichimoku lines on a stock chart or as complex as two or more technical indicators and multiple time frames.
There’s virtually no limit to these rules as long as they follow your investment strategy.
Use Your Trading Platform’s Bot Builder
If you can’t hire a programmer to build your stock trading bot, you can also try out your platform’s “wizard” for strategy building and automating. It’s usually pretty easy and doesn’t require in-depth knowledge of programming.
After integrating your trading bot into your stock trading platform, it’ll analyze the market and look for opportunities to open trades based on your strategy. It’ll also:
- set profit targets
- trailing stop and stop-loss levels
- close trades based on your specific requirements
Buy Pre-Programmed Stock Trading Bots
Another option stock traders have is buying already-programmed bots from online vendors. Many of them are customizable, so you can find the one that suits your strategy best. It would also help to read reviews of those bots from other users so you know you’re getting what you need.
Test Your Stock Trading Bots
Regardless of where you get your stock trading bot, ensure you extensively backtest it on historical data. Based on that, you can adjust your strategy or the bot commands. You can also run the bot on demo accounts to test it on future price movements before risking real money.
Note that these systems can be prone to programming errors and glitches that could get in the way of your trading goals.
How Stock Trading Bots Are Profitable
When programmed right, stock trading bots can do everything human equity traders can do — albeit faster, more accurately, and less likely to be swayed by emotions.
As a human, you can make all sorts of errors when reading or placing orders on the stock market. You have to deal with tons of data, and there’s only so much you can do to make sense of it all. You can even make basic errors like forgetting to set a protective stop-loss level.
But with a stock trading robot, you can minimize (or even avoid) these mistakes. Unless unforeseen issues crop up (e.g., failing to account for certain factors in the programming phase), the system will tirelessly follow your programming without fail. The greater the accuracy of an excellent trading strategy, the more profitable it can be.
The moment your automated trading system spots a stock that matches specific requirements, it’ll take the corresponding programmed action in the blink of an eye. Your trading bot effortlessly scans the stock market, so you can quickly benefit from the slightest positive market movement or avoid a negative one. For small trading account owners, these moves can make all the difference in the world in terms of profits.
Less Likely To Be Swayed by Emotions
Let’s face it: Stock trading can be nerve-wracking at the best of times. The market can either skyrocket or crash depending on the whims of everyone else. And without a stock trading bot, it can be difficult to stay calm and not do anything drastic like buying or selling a stock before it’s the right time to do so.
On the other hand, stock trading bots have no concept of panicking. They don’t get a rush of dopamine when prices rise or get near-heart attacks when prices plummet. Instead, they’ll always act according to how they’re programmed regardless of where the markets go.
That said, you should keep in mind that there’s no “perfect” strategy that will earn you profits every single time. Even stock trading bots can experience losses. Still, they can significantly reduce your chances of flushing your hard-earned cash down the drain if they’re used right.
Also known as Automated Trading Systems (ATS), stock trading bots can be programmed to create and close orders in the stock market. They can also set profit and stop-loss levels to maximize your earnings.
Depending on your programmed trading strategy, stock trading bots can be profitable or not, owing to their accuracy, speed, and a lower likelihood of being swayed by human emotions.
- Wikipedia: Stock market
- Thinkorswim: ThinkScript
- Quora: Ivan Pavlovic: How I can create my trading bot using Python
- Investopedia: Automated Trading Systems: The Pros and Cons