UPDATE 2017: US online stock and options brokers no longer offer auto trading. View our list of the best online brokers.

At StockBrokers.com we’d like to do a short series occasionally a fast-growing area inside the online brokerage world that some investors might not know much about. Autotrading is a fairly new concept in the world of securities trading, and only a few online brokerages offer the ability to use autotrading inside your account. In the next few years, I fully expect more online brokers to move to offering autotrading programs and functionality as the demand for such features continues to increase. What exactly is autotrading? How did autotrading get its start? What are the primary uses of autotrading for the average investor? Let’s take a closer look at all of these questions.

Autotrading Defined

Autotrading is best defined as a trading strategy where buy and sell orders are entered automatically based on an underlying investment system or program. In order for a trade to take place a certain set of criteria must be met. The most common types of criteria used by investors in this area are technical indicators and price movements. Rarely do you see a fundamentals investor using an autotrading service, but investors who trade based on technical patterns use this feature quite frequently.

The History of Autotrading

Autotrading got its start in the FOREX markets. There are now numerous competing autotrading systems that are used by FOREX traders on a regular basis. Traders in the FOREX markets began to see the huge benefits associated with automated trading systems, and in the past few years autotrading has begun to creep into other markets. Options traders frequently use autotrading to set buy and sell points based on specified price movements. The futures market has seen increased action from traders in general as commodities have skyrocketed over the past few years. Some commentators have even speculated that autotrading programs could be partly to blame for the meteroric rise in oil prices. Investors in the stock market have been a little slower to embrace autotrading systems, but recently they have taken hold because of their ability to incorporate newsletter recommendations.

The Primary Use of Autotrading for the Average Investor- Investment Newsletters

What has brought autotrading to the average equity investor? The functionality to sync a particular investment newseletter to your individual online brokerage account. Online brokers who have autotrading features have established relationships with various investment newsletters. Investors who wish to directly follow the advice of a newsletter will then sign an agreement with his or her online broker to start the autotrading through investment newsletters process. This agreement says that you will allow the investment newsletter to directly send trading instructions and execute trades inside your account without receiving your permission each time. It should be noted that there are obviously some large risks associated with allowing someone else to trade in your account without consulting you each time. Make sure you research the investment professionals at that particular newsletter very well before ever signing an autotrading agreement that allows them to direct the trades inside your account.

These online brokers are at the forefront of a movement that I believe is here to stay. Expect more online brokers to get autotrading platforms over the next few years. Let’s take a closer look at which brokers offer autotrading and examine some details about their specific systems.

The Brokers Who Offer Autotrading

1. OptionsXpressOptionsXpress is well-known for having an impressive trading platform, and this is an online broker who has taken the lead in the move toward autotrading programs. The Xecute program was designed specifically for automated trading purposes. There are no extra fees on each transaction using the Xecute system. There is no minimum necessary to begin using this program and OptionsXpress has done a very good job establishing a relationship with a lot of different investment newsletter publishers. OptionsXpress isn’t the cheapest when it comes to transaction fees, but Xecute is an investor-friendly program.

2. thinkorswimthinkorswim has the kind of tools that a trader absolutely loves, and its Autotrade program is just another tool that helps set it apart from other online brokers. thinkorswim has done a great job making their Autotrade program extremely thorough, but still easy to understand. The Autotrade platform here gives investors six different allocation methods to utilize. The six methods are: specified dollar amount, specified quantity, percentage of available buying power, percentage of net liq, entire account value, and fixed account value. This allows the investor a plethora of different options for allocating Autotrade transactions into his or her portfolio.

3. TradeKingTradeKing received high marks in the stockbrokers.com 2011 Online Broker Review. TradeKing has firmly established itself as a major player in the industry because of high-quality customer support and low-cost transactions. The TradeKing AutoTrade platform is a fairly basic one, but it is extremely cost-effective. TradeKing’s AutoTrade system allows the investor to make automated transactions based on a newsletter’s recommendations for just $4.95 per trade. There isn’t another online broker where you’ll be able to find autotrading transactions for such an affordable price. Many of the leading newsletter providers are available through this platform.

4. tradeMONSTERThe tradeMONSTER Autotrade system is a user-friendly platform that allows investors to receive autotrading services for a low cost. This an online broker that has done a good job listening to its customers. This broker has added many investment newsletter publishers over the last few months as customers continue to recommend new publishers. While this is not quite the high-tech system that OptionsXpress or thinkorswim offer, tradeMONSTER does a good job executing trades in a timely manner.

In this final section, it is time to take a look at the do’s and dont’s of autotrading. Clearly, autotrading isn’t for everyone, but for those who wish to use autotrading they must do so wisely. As with any investment program, an investor should never use it until there is a full understanding of the risks involved. Let’s take a look at three do’s and three dont’s of autotrading.

Three Do’s of Autotrading

1. Do Have a Set System That You Stick To- When investing it is a rarely a good idea to simply change the rules constantly, and autotrading is definitely an area where you’ll want to have a specific system that you continually use. Know what your trading strategy is and don’t bend the rules for any reason. Autotrading is typically used by active investors, but you don’t want to make anymore trades than you must.

2. Do Thoroughly Research Newsletters- The average investor uses the autotrading feature to allow newsletters to trade inside his or her brokerage account. Before you ever sign any kind of agreement you must do thorough research on these investment newsletter. Not all investment newsletters are created equally and you’ll want to make sure you are allowing one of the top newsletters in the industry to access your account. There is plenty of  data around the web regarding newsletter performance so do your due diligence!

3. Cut Costs of Autotrading- The bottom line is there aren’t that many differences in the autotrading programs offered by the online brokers. They all have very similar features. This means you should highly consider going with the cheapest online broker to significantly cut your costs. Commission fees can add up quickly when autotrading if you aren’t careful. Be conscious of the costs associated with frequent trading.

Three Dont’s of Autotrading

1. Don’t Get Too Ambitious- While allowing a small number of high-quality investment newsletter publishers to trade inside your account can be a profitable idea, opening up your account to numerous newsletters isn’t likely to be a good choice. Different publishers will have different strategies and allowing too many to work in your portfolio at one time is likely to cause some dueling philisophies.

2. Don’t Pull the Plug Too Quickly- While it is certainly a good idea to track the results of your autotrading program, pulling the plug on an underperforming publisher too quickly isn’t the best idea. If a newsletter publisher has proven over time to be one of the best at what they do, make sure you allow them plenty of time to help build up your portfolio.

3. Don’t Put Too Much Stock in “Testimonials”- When looking for a good investment publisher, do not simply look at promotional materials from that particular newsletter publisher. Some newsletters publish testimonials and promotional statistics, but you would be wise to seek out independent research rather than taking the word of someone who has a vested interest. There are plenty of independent websites online that will help you separate the winners from the losers, so take advantage of the resources at your fingertips and find a true winner for your portfolio!

Learn more about the brokers that support autrotading in our online broker reviews.