What You Should Know Regarding Algorithmic Trading
The algorithmic trading has greatly increased in the past years. This helps in improving such market quality and should this be encouraged? Well, there are so many of those who say that algo trading does help in improving the liquidity and would also boost the informativeness of the prices and quotes.
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. The benefits of such algo trading are related to accuracy, speed and also reduced costs. 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.
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. The two emotions that would lead to a poor decision that algo traders aren’t made susceptible too are fear and greed.
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. In algo-trading, you may run the algorithms according to previous data so that you can see if this really worked before. This kind of ability would give you a huge advantage because this allows the user to eliminate any flaws of the trading system prior to running such live.
A great benefit that you can get from automated trading is such reduced transaction costs.