Algo trading and its benefits | Findoc

 What is Algorithmic Trading?

Algorithmic trading, also known as algo trading, black box trading or automated trading, is a strategy that uses computer programs under a specific set of instructions to place a trade. It works based on price, timing, quantity, or any other supporting mathematical model. This type of trading has become popular due to its ability to generate profits and income at a level that is impossible for a human alone.

Most traders today in the market depend on high frequency trade due to its high returns. The high frequency trade has unique capabilities including the ability to place a large number of orders across multiple trade markets. It also works at rapid speeds based on programmed instructions.

Benefits of Algorithmic Trading

The popularity of algorithmic trading have gone off the roof in the last few years, majorly accounting to it’s number of advantages over manual trading. Algo trading have been here for years but the many players (traders/investors) still doesn’t know about the advantages of machine (or computer) trading over a human.

• Ability to Remove Human Emotions from the Market

One thing that sets apart a human from a machine is his ability to have and show emotions. Being an advantage in many real-life scenarios, it can sometimes work against you, especially when you are trading and needs more rational thinking and less emotional bias. Algo trading can be an expert in this region. Without any emotional bias, algo-trading follows a certain set of instructions and stick to it.

• Accuracy in Trading

Computers are way more accurate when it comes to executing a set of rules. Rationally, no one will move to a less accurate option, when a large amount of money is at stake. Making more profits is way easier when you can avoid a lot of consequences because of human mistakes while executing trades.

• Ability to Place Multiple Trades under Fast Speeds

An algorithmic trade creates an avenue where traders can place numerous trades while maintaining speed and accuracy. Making multiple trades increases the probability of raking in more profits. Increased innovation and adoption of technology has rapidly increased the speed of transactions.

• Reduced Transaction Costs

Without the constant supervision of humans, computer programs can work for a large duration and thus reduces the cost of human resources. Less cost on each trade certainly improves your chances of making more return on your investment. This makes algo trading more attractive to many traders around the world.

• Ability to Backtest

Traders are required to find out which parts of their trading system have faults and craft out solutions to correct them as quickly as possible to avoid unnecessary losses. With algo-trading, traders have the ability to back test their trades with past data and compare them to current data. This is a recommended strategy to see if trades would have come back the same.

Forms of Trading used in Algo-Trading

• Mid to Long Term Investors

Mid to long term investors buy stocks in large quantities using algo-trading when they have no intention of disrupting stock prices with large investments. Some of these investors in the market include side firms, mutual funds, insurance companies, and pension funds.

• Short Term Traders

Short term traders are also known as market makers or sell-side traders in the market. Brokerage houses are considered the prime market makers in any trade. They make it easy and smooth for the financial markets to purchase and sell their stocks at convenient prices. Short term traders often place bids in a two sided market. 

• Systematic Traders

Systematic traders include both manual trading systems and partly digital trading systems using computers. Such traders focus on outlining and analysing trade goals and objectives to ensure risk control and mitigation while investing in any trade. Thus, systematic traders feature both high frequency trading and systematic trading to increase profits and reduce the risk of losses.