On the surface, building an automated trading system seems like a great idea. Who wouldn’t want a machine that you turn on and generate profits?
Such systems do exist. And often the actual buy/sell/hold algorithm is not very complicated. But before you buy or build your personal ATM, there is much work to be done.
You have what you believe to be a winning strategy. You have back tested and even forward tested it. Now you want to put it into production. Congratulations, you have done more work than many. But there is still work to be done on your strategy.
The simple fact is that you, your strategy, and your broker perform differently when real money is involved. Here are some things that you should consider beyond your strategy.
Who will be responsible for placing the orders? Do you plan to use your own PC, or is the strategy hosted by someone else? Perhaps your broker hosts the strategy. Who is culpable when things go awry? What is the procedure when such events inevitably happen?
Did you consider the costs of your strategy? Are you assuming that a “market order” is going to give you something between the bid and ask? This is not always the case.
Does your strategy consider rebates or costs savings by switching venues?
Even if the network is alive and your order is accepted, that doesn’t mean things continue to go smoothly. Did you plan for what to do with partial fills? What should be done with orders canceled by your broker, or by the exchange itself?
Your order is filled. Now what?
Normally, you let your system continue to function. Perhaps the stop loss and take profit orders are in place waiting for one of your limits. Will they be there if the network goes down? What happens if the exchange has one of their famous glitches?
And then there is your emotions. What if the trade goes beyond what you feel comfortable with? What if new information comes to light, and you decide to close the position? Your system must respond accordingly.
Buying Power Issues
Brokers have risk systems that protect them from you. And often, their “paper trading” or test system will not include this. Will your system cause you to bump into their risk rules? Additionally, shouldn’t your system include code to measure risk?