Some Things to Know About Algorithmic Trading
Such algorithmic trading has surely increased in the previous years. This helps in improving such market quality and should this be encouraged? 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. Because the algorithms were actually written beforehand and they are executed in a manual way, 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.
Algorithm trading has the benefit of scanning as well as executing on the different indicators at a speed that no human is able to do. Due to the reason that the trades are being analyzed and they are done in a much faster way, then you will surely have more opportunities and they are made available at a lot 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. Through manual entries, it is a lot more likely to purchase the wrong currency pair or such wrong amount as compared to the computer algorithm which has been double checked to ensure that there is correct order entered.
What is a big benefit to this kind of trading system is that this has the ability to get rid of human emotion from such markets and the trades are actually constrained in that set of predefined criteria. One great reason why such is really a benefit is the fact that a human trading would be prone to a lot of emotions and this would cause irrational decisions. Such two emotions which lead to poor decision which algo traders are not susceptible to are greed and fear.
What is also great about algo trading is such ability to backtest. 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. With algo-trading, you can surely run the algorithms based on past data to be able to see if such worked in the past. Such type of ability would surely give you that big advantage since this permits the user to avoid the flaws of such trading system before running this live.
One excellent benefit that you can have from automated trading is the reduced transaction cost.