Some Things to Know About Algorithmic Trading
The algorithmic trading has greatly increased in the past years. Such would help to improve the market quality and is it best to encourage this? There are a lot of those who are saying that algo trading helps in improving such liquidity and also boosts the informativeness of the quotes and prices.
The big reason why such algorithmic trading has really become quite popular is because of the advantages which holds over trading through the manual method. What you must know is that there are many benefits that you can get from algo trading like reduced costs, speed and accuracy. Due to the reason that such algorithms were written in advance and done manually, then the main benefit is speed. Speed in which the different trades are done is being measured in just fractions of a second which is much faster than what the humans can perceive.
The algorithm actually has the benefit of scanning and executing on various indicators at a speed which no human has done. Because the trades may be analyzed as well as executed in a much faster way, then there are a lot more opportunities which are available at better costs.
Also, a benefit to such algo trading is accuracy. When a computer can execute a trade automatically, then you will be able to prevent the pitfalls of putting the wrong trade accidentally which is common in human trades. With the manual entries, it is more likely that you would buy the wrong currency pair or that wrong amount unlike the computer algorithm that has been double checked to make sure that a correct order is being entered.
One of the largest benefits of algo trading is such ability to remove human emotion from those markets, trades which are constrained in a set of predefined criteria. A reason why this is one advantage is due to the reason that the human trading is prone to emotions that can result to irrational decisions. The two emotions that would lead to a poor decision that algo traders aren’t made susceptible too are fear and greed.
Being able to backtest is also a benefit from algo trading. It can be difficult for the traders to know the parts of the trading system work and what doesn’t work because they cannot run their system on previous data. Through the algo trading, you may run the algorithms according to the past data in order to see if it would have worked previously. Such ability gives a big advantage since it lets the user remove any flaws of the trading system before running this live.
One excellent benefit that you can have from automated trading is the reduced transaction cost.