An automated trader system is used to program trade exits and entries according to the trader's specific rules, which are made through a computer, according to Investopedia. The rules used to program a trader can be as simple or complicated as the trader desires. Software for automated systems is often required to be connected to a direct access broker.
Advantages of using an automated trader include better managing of emotions, having the option of backtesting, and consistency, notes Investopedia. Traders don't have to worry about hesitating on making a trade, which can negatively impact a trading plan. Automated traders also allow for applying trading rules to past historical market data to see how useful the data is, which is known as backtesting.
Potential disadvantages of using automated traders include mechanical failures that include too much optimization, and having to keep an eye on the system, according to Investopedia. There's a chance a trade might not process if the computer loses its Internet connection, and there can also be discrepancies between real trades and theoretical trades. When backtesting, there's a possibility that a system that works perfectly in theory can fail when applied to a live market. Without monitoring events taking place on an automated trader system, the trader can have missed orders, duplicated orders or incorrect orders.