In 2020, the East African stock market automation project went live. Before that, those who wanted to trade local shares would need to claim their shares certificate in person and then bring or physically send it to the market they wanted to trade in.
The new EAC Capital Markets Infrastructure, however, allowed stakeholders to open an account across markets and transact shares of companies listed in Rwanda, Uganda, Tanzania, and Burundi, as well as any African country that may join in the future.
While the most evident feature of this development is access to these capital markets, their merging and digitisation offer another significant opportunity: to practise automated trading.
Organisations and companies already use this tool to improve operational efficiency and quicken deal closures. As an individual trader, you can, too. Here’s everything you, as an African trader, need to know about automated trading.
What is automated trading?
Most trading methods will have you manually enact your trading strategy when you spot an opportunity. Automated trading—also known as algorithmic trading—does this process for you without needing your real-time input.
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You set rules in advance for entering and exiting trades, which are best determined by extensive technical analysis, research, and your preferred trading strategy. From here, you allow the system to carry out your programmed trading instructions.
This means that the system will place the trade on your behalf whenever a trade aligns with your criteria—for example, buying 100 Microsoft shares when its 50-day moving average goes above the 200-day average. You can then check on the outcomes of your trades periodically and adjust your criteria according to your observations.
Advantages of automated trading
It takes the emotion out of trading
Attaining success in trading requires substantial research and a clear and observant mind. However, many traders fall into the trap of becoming emotionally involved in their transactions, making the easy mistake of either being too cautious, too reckless, or engaging in revenge trading after losses.
With automated trading, your platform functions on the strategy you formulated when you were composed and ready to review the relevant technical indicators and market trends. Your platform can even backtest your strategy. No longer will you have to face the consequences of impulsive transactions.
You have access to more efficient trades 24/7
Secondly, automated trading is more proficient at scanning and executing trades. Your chosen platform can monitor multiple markets and trading indicators at once and can immediately and accurately identify opportunities based on your criteria. Once it does, your platform can execute the trade in a fraction of a second.
Your platform is also capable of doing this 24/7. This means that as a trader, you won’t need to be bound to the computer in hopes of a greater profit—you can sit back and focus on other matters, assured that your platform is continuously implementing your trading plan. When you return, you can review the results of your strategies, energised and ready to do what it takes to improve your process.
Disadvantages of automated trading
Over-optimised trading strategies
With automated trading, you may end up producing a plan that may look near perfect but fails in a live market. While the criteria use may be sophisticated, at the end of the day, the system does not have a mind of its own.
If market conditions suddenly change so that your current plan becomes obsolete or detrimental, your automated trading software will continue accomplishing your previous strategy regardless. That’s why it’s still important to check on your trades periodically and adjust your strategy when needed.
It’s also important to note that your platform relies on your computer and is therefore vulnerable to mechanical failures like a lost internet connection, power losses, and computer crashes. It is possible to have safeguards against this, such as purchasing a virtual private server. However, it’s still important to remain vigilant when you’re trading and back up your data regularly.
How to optimise automated trading
Pick the right platform
If you’re ready to start automated trading, the first essential step is to choose the right trading platform. Platforms like xStation 5, TradingView, and cTrader are all available for use by African traders, but by far, the standouts in this field are MetaTrader 4 and 5.
MetaTrader 4 is used mainly by forex traders, who appreciate its widespread availability and efficiency. Meanwhile, MetaTrader 5 is best for multi-asset trading. People looking to acquire non-forex CFDs and who want a powerful platform will benefit from features like more comprehensive fundamental and technical analysis tools, trading signals, and, of course, automated trading.
This platform allows you to use trading robots with pre-installed technical indicators and develop your own using your parameters.
You can also use the new automated system Avento. This was launched in 2022 by the Stock Exchange of Mauritius. Funded by the African Development Bank, the trading platform aims to encourage and support the development of capital markets in Africa.
It also possesses features like data distribution integration, the ability to trade derivatives, and a state-of-the-art surveillance system that raises alerts during instances of market abuse or irregular trading practices. The platform serves as a safe and government-backed option, but only in countries that have it.
Select the correct parameters for your needs
The success of your automated trading depends on the strategy you set. Some of the most common ones you can choose to use are trend-following strategies. This involves your trading platform using technical indicators to detect the occurrence of desirable trends and execute your desired trades.
Leveraging 50- and 200-day moving averages is one example. You could also use mathematical model-based strategies like delta-neutral trading, where your platform leverages multiple positions to balance positive and negative deltas. The ultimate goal with this strategy is to bring your net range to zero.
Time-weighted average price strategy, on the other hand, tries to execute your trade close to the average price between the start and end times by dividing a large order and releasing it in smaller chinks and in uniformly apportioned time slots.
Pick the strategy that resonates with you. Then, try it out by using your platform’s backtesting feature to see if your strategy holds up against available historical and real-time data. If it does, you can be cautiously confident about implementing this automated trading strategy with your actual trades.
Automated trading can benefit you as an African trader. With the right strategies and platform, you can leverage this efficient tool to earn more profits with less real-time input.