Automation of Trading: 7 Things to Keep in Mind While Building Your Program

Articles From: Interactive Brokers
Website: Interactive Brokers

By:

Interactive Brokers

Introduction:

In recent times, the surge in popularity of automated trading has become increasingly evident. Traders and investors are now turning to automated systems to streamline their operations and capitalize on market opportunities swiftly, with the use of Application Programming Interfaces (APIs) standing out as a key methodology. The appeal of automated trading transcends programming languages, making it a versatile choice for traders seeking efficiency and precision, and of course, time saving. In this article, we will walk through 7 components that play a major role when it comes to automating your strategy using API.

0. Setup your API connection and get authenticated:

Regardless of the programming language you choose, the first step involves establishing an API connection and/or getting authenticated into your trading platform. These credentials serve as the gateway for your code to connect with the platform’s API, enabling access to real-time market data and order execution capabilities and account information.

1. Market Data Retrieval

Once authenticated and a connection via API is valid, you can use the API to retrieve market data, including real-time prices, historical data, tick-by-tick, Market Depth etc. Leverage language-specific libraries or API wrappers to streamline the process and interact with multiple exchanges if necessary. Upon receiving the data, a myriad of operations can be initiated. Whether your objective is to store the data for subsequent analysis or apply calculations that enhance decision-making, these processes contribute to a deeper understanding of the securities involved in trading.

2. Strategy Implementation:

Implementing your trading strategy is language-agnostic. Whether you’re using Python, JavaScript, or any other language, define your strategy with precision. Consider factors like entry and exit signals, position sizing, and other factors that align with your trading strategies. Orders’ behavior can be further enhanced through powerful algorithmic strategies such as Jefferies Algos, Quantitive Brokers Algos, CSFB Algorithm etc. Check out the Algos available in our Interactive Brokers API

3. Risk Management:

Implementing robust risk management strategies is essential for any trader. Protect your capital by setting stop-loss orders, defining position sizes, and managing overall portfolio risk. This step is crucial for the sustainability of your automated trading system and for a successful trading journey.

4. Order Execution:

Utilize the capabilities of your chosen coding language to build a program to execute, buy and sell orders based on your trading strategy. Learn and incorporate the necessary order types, such as market orders or limit orders or other complex orders, to align with your specific strategy.

Markets are not static, so changing your order type based on the market conditions or predictions is crucial to succeeding as a trader. With automation, orders are the end goals, so building a robust and smart strategy to execute the correct order types is key.

5. Back-testing & Paper Trading:

Before deploying your strategy in a live market and with real funds, conduct thorough testing using a simulated trading environment. Regardless of the language, this step allows you to evaluate your strategy’s performance under various market conditions and timeframes.

Additionally, most trading platforms offer paper trading accounts, allowing you to test your strategies in a simulated environment. Regardless of your level of expertise, this step is crucial for gaining confidence in your system’s performance before risking real money in live trading.

6. Monitoring and Logging:

Implement monitoring tools to track your automated trading system’s performance. Log important events, errors and anomalies for easy debugging and continuous improvement. Logs are crucial for troubleshooting as they are a record of the communication happening via API.

7. Deployment:

When testing and refinement are complete and you are confident with your program, deploy your automated trading system in a live environment. Start with a small amount of capital to minimize risks. Monitor performance closely and be prepared to make adjustments based on real-market feedback and your gains and losses.

Conclusion:

Automating your trading is a versatile endeavor that can be undertaken in various coding languages and unlimited strategies. Whether you’re using Python, C++, C#, Java, or another language, the principles of risk management, thorough testing, and continuous improvement remain universal. By following these steps, you can build and deploy a robust automated trading system, adapting to changing market conditions and ensuring sustained success. To ensure success, always stay informed about market developments and be ready to refine your strategy for optimal performance.

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Disclosure: Interactive Brokers

The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Interactive Brokers, its affiliates, or its employees.

Disclosure: Order Types / TWS

The order types available through Interactive Brokers LLC’s Trader Workstation are designed to help you limit your loss and/or lock in a profit. Market conditions and other factors may affect execution. In general, orders guarantee a fill or guarantee a price, but not both. In extreme market conditions, an order may either be executed at a different price than anticipated or may not be filled in the marketplace.

Disclosure: API Examples Discussed

Throughout the lesson, please keep in mind that the examples discussed are purely for technical demonstration purposes, and do not constitute trading advice. Also, it is important to remember that placing trades in a paper account is recommended before any live trading.