Self-Directed Trading vs Automated Trading - What is the Difference?

Introduction

Ever since the rise to popularity of retail trading platforms, it has become increasingly possible for a vast proportion of the global public to access a trading environment which emulates that of the institutional and interbank trading world.

During the 1990s and early 2000s, a vast array of retail electronic trading companies came into existence, many offeringForex and CFD trading, and using off-the-shelf platforms meaning that suddenly, the market was flooded with over 1,000 platforms, all similar to each other.

It soon became clear that the global appetite for instantly accessible forex and CFD trading was expanding rapidly, and the need to develop tools to assist the various trading styles that were being implemented via retail platforms was indeed great.

OVALX has a particularly advantageous product and service offering as it is one of the few retail Forex and CFD companies which develops and operates its own proprietary trading platform, therefore is able to provide a comprehensive service and range of asset classes as well as support the trading environment in-house, compared to the vast amount of brokerages which use off-the-shelf platforms and therefore cannot offer a diversified product range or support the trading environment in-house.

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What is self-directed trading?

Self-directed trading is a method of trading the global financial markets via an electronic trading platform in which the trader manually opens and closes positions.

Often, when trading manually on a self-directed basis, traders will use market analysis and detailed news of recent events and current affairs whilst monitoring the prices of certain asset classes, and then execute the trades themselves on the trading platform.

There are many charting and technical analysis tools which are widely available which also provide valuable information to traders wishing to operate their own trades.

In certain markets, such as Japan, which is the world’s largest market for retail Forex, almost all trading is self-directed and as a result, all of the domestic market retail electronic trading companies provide their own proprietary platforms as this increases customer confidence, allows trading companies to control the quality of the front end experience and execution practice as there is little or no market for trading robots or Expert Advisers (EAs).

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What is automated trading?

Automated trading is the practice of utilizing pre-programmed trading robots, often referred to as Expert Advisers(EAs) or algorithmic computer software to execute trades automatically on trading platforms.

In retail forex and CFD trading, the trading platforms used in automated trading are identical to the ones used in self-directed trading, the only difference being that the person or party depositing the trading capital with a brokerage becomes an investor rather than an active trader.

As an investor rather than a trader, trading robots and algorithms are connected to the same retail trading platform that would otherwise be traded by a self-directed trader, and those trading robots or algorithms trade the markets on behalf of the investor, who takes a passive role and monitors the activity carried out by the automated robots and algorithms.

In this method, an investor may study chart patterns, news and technical analysis in the same way that a self-directed trader may, but use the information gained from them to monitor the performance and execution activity of the trading robots or algorithms.

Automated trading has grown tremendously in popularity over the past ten to fifteen years, and in certain markets, such as main land China, almost all retail trading is conducted via automated methods.

A precursor to this method was social trading, which was a popular method in the mid to late 2000s, in which retail traders joined a social network provided by their brokerage which allowed them to follow the activities of ‘leaders’, or to program their platform to follow the leaders and execute trades using the strategies of leaders on the social platforms.

This has largely been superseded by fully automated trading which emulates the institutional world, and a vast ecosystem of trading robots and automated trading software has become available to the retail trader which is compatible with retail trading platforms.

For example, the off-the-shelf MetaTrader 4platform, initially released in 2004, has remained in operation for almost 20years which is unheard of for any version of commercial software in any industry.

This is because a large range of ExpertAdvisors (EAs) have been developed which attach to the MetaTrader 4 platform and can operate it automatically.

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The role of portfolio managers

The availability of automated software for retail trading platforms has given rise to a massive sub-sector in the retail trading industry, that being portfolio managers for forex and CFD investors.

Mostly, portfolio managers are private individuals who act as traders and are customers of retail forex and CFD brokerages, who will trade the accounts of others on their behalf.

This is often conducted via what is known as a MAM and PAMM accounts.

MAM stands for Multi-Account Manager. With this method, portfolio managers attach several trading accounts to one single terminal, and individual trader accounts are collectively combined into a large pool, representing a managed fund that comprises of individual trader accounts as well as investor accounts.

All orders executed on the master trading account are reflected on every associated MAM account according to the parameters set by the investor.

These are often traded automatically, with the master account being connected to a trading robot which executes trades on the master account and then replicates them through all of the connected accounts which belong to investors.

PAMM stands for Percentage AllocationManagement Module. In this method, a designated percentage of trading capital deposited by investors is allocated to copy trades from a master account operated by a portfolio manager.

The PAMM structure is different from other types of managed accounts, as PAMM investors can follow different trader accounts and diversify their trading capital by allocating different percentages to different trading systems.

These are often traded automatically, with the master account often being connected to an algorithm or trading robot which trades the main account, with the managed accounts echoing that trade but on a percentage allocation basis.

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Summary

There is a highly developed retail trading ecosystem which is automatically traded these days, and investors with their own accounts and own algorithms or trading robots are commonplace around the world.

Similarly, there are markets in which manual trading is the default, as is the case in Japan and North America.

Robots are in widespread use among portfolio managers around the world, who often code their own systems in order to implement their own strategies and then have attached accounts via the MAM andPAMM method replicate the trades which are executed automatically on the main account.

Either method is very much part of the mainstream these days, and it is recommended to contact us for more information on both methodologies.

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