Is Algorithmic Trading RIght for You?
Introduction
The stock market is always buzzing with activity. Trading is all
about a keen eye for the ups and downs of the market. Investing in stocks
requires knowledge, speed, and flexibility, among several different
things.
There are new methods to achieve more profit from the stock
market, such as Algo Trading. The basis of Algo trading is cashing on the
hidden and quickly emerging patterns in trading which human being can miss.
Machines can be programmed to read previous designs and read quickly emerging
ones, thus bringing out the opportunities to trade profitably.
One of the reasons as well for its emerging popularity can be
that earning is much more through algo trading than trading manually. Before
jumping into the question of ‘Is Algo Trading right for you?’ it is necessary
to understand the basics. We’ll cover a few terminologies here and then go
further to answer the question.
Algorithm Trading:
Let’s start with understanding the term- Algo Trading.
Algo is short for the Algorithm. The steps you perform to
achieve the desired result as an Algorithm. You set these instructions for the
machine to process and execute. Trading is the transaction of stocks. To
summarise, algo trading is when you define an algorithm to the machine for
selling and buying shares. The Algorithm will be implemented when the
conditions specified for the transaction are met.
How can Algo Trading be helpful?
Different aspects play an essential role in the buying and
selling of stocks. Some of the causes of loss in the stock market can be:
- Inconsistency in decision making
- Inadequate analysis of the market
- Little to no knowledge about the current market
scenario, etc.
This is where algo trading strategies can help.
The psychological aspects of stock trading can be controlled
through the algo trading strategies. A machine doesn’t have any emotional
inclination. Thus it can strictly follow the consistent trading system
instructions. Also, there isn’t any comparison between the speed and frequency
of a human and a machine.
Algorithm trading and Intraday Trading Strategies:
The algorithm trading works exceptionally well when used with
intraday trading strategies. Intraday trading revolves around buying and
selling stocks within the time limit of the market for the day. These are
short-term trades and are for gaining considerable profits from the market at a
given point of time in the day.
Intraday trading strategies differ depending on market
conditions. Intraday traders need to be quick. Speed and knowledge about the
market are crucial factors in intraday trading. This is where algo trading
comes into play. The machine can process and execute the steps for the
transaction at a much quicker pace than a human trader.
Are algo trading and automated trading the same?
Algo trading can either be semi-automated or completely
automated, according to the choice of the human trader. Thus, people often use automated trading and algorithm trading interchangeably. However, both terms are
not necessarily the same.
Algorithm trading is when the execution of the process is done
based on the set of written instructions (or Algorithm). On the contrary,
automated trading is the complete automation of the buying and selling process
of stocks. Thus, the creation, submission, and execution of the order are
entirely automated.
Advantages of Algo Trading:
Now, coming back to our initial question of ‘Is Algo Trading
right for you?’ To know if something is beneficial or not, we must weigh its
pros and cons.
There are many pros of Algorithm trading, which outweigh the
cons by a significant margin. The advantages usually cover the aspects which
are the contributing factors in the thriving trading process:
·
Speed
When doing Algorithm trading, algorithms are pre-written, and
the instructions can be executed automatically. The analysis can be done at a
faster speed, thus providing better opportunities. The machine, with the help
of the Algorithm, can scan and implement different factors at a crucially fast
pace.
- Accuracy
In any business or trade, accuracy is the key to achieve
successful results. Similarly, in algorithm trading, skill is essential. With
the incorporation of machines in the trading process, common human errors are
reduced.
When a person is trading manually, many of his judgments can be
a result of greed or fear. But in the case of machines, there is no room for
such an error. The device strictly follows the Algorithm to process the transaction.
To trade accurately, you can backtest the trading algorithm.
Backtesting the trading algorithm is running the created Algorithm through the
previously present data and studying its performance. In simple words, how
viable the trading strategy is against historical data.
- Reduced Costs
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