Advantages of automated trading strategies

Automated trading has been a revolution for the traders. It has not only helped in reducing the risks associated with the trading process, has also been instrumental in catching the attention of a number of people who otherwise wouldn’t even have considered going into the trading market at all. Today, nearly 40% of all the trades that happen at the National Stock Exchange (NSE) happen via Algorithmic trading strategies or automated trading. This new mode of trading has been able to garner so much success in so little time because of a plethora of advantages that it brings to the table.

Advantages of Automated Trading

There are a number of advantages of using computers to monitor the fluctuating markets. Let us take a look at some of the major ones:

Removing emotional bias

Two of the worst enemies of a trader that deals in algo trading strategies are fear and greed. Humans are often governed by emotions and against our emotional impulses, our logics often fail. This can cause us to suffer losses at the stock market. A computer, on the other hand, is incapable of feeling these emotions and works solely on logic. Therefore, automated trading helps us control our impulses and make sound decisions.

Backtesting

Backtesting applies trading rules to historical market data to determine the viability of the idea. An algorithm can’t just be good on paper. The stakes are so high in the stock markets that we have to be absolutely sure that our algo trading strategies work. Backtesting is done by running the algorithm on previously obtained data to see if it would function properly in a live market. This makes sure that the algorithm would deliver profit.

Improving Order Entry Speed

Since computers can respond immediately to the fluctuating market conditions, automated trading enables you to generate orders as soon as trade criteria are met. When it comes to getting in or out of a trade, every second matters, and computers provide that. As soon as a position is entered, all other orders are automatically generated, including protective stop losses and profit targets. The stock market moves at a very fast pace, and it could be disheartening to see a trade reach the profit target or blow past a stop-loss level – before the orders can even be entered. This issue is not a concern when it comes to automated trading.

Diversifying Trading

While doing automated trading, a trader can operate multiple accounts and make the use of different trading strategies at the same time. By doing this, the trader can effectively spread risk over various over various instruments while creating a hedge against losing positions. Something that would be nigh impossible for a human to accomplish is done with the help of a computer within a fraction of a second.

With all these benefits, the automated trading has revolutionized the trading landscape by a great deal, and now, more and more traders are migrating towards this new and effective way of trading.