3 Major Advantages of Algorithmic Trading

Algorithmic trading is a process of using computers to identify and execute trading opportunities which are based on a trading strategy that has been programmed by a human trader.

Algorithmic trading enables the traders to program their trading strategies for entering & exiting a trade into computer software. The algorithmic trading software will then automatically alert the traders whenever there are trading opportunities that fit into the criteria arises. The trade is made, and profits can be taken when it hits the pre-set level. On the downside, there will be losses as well when the stop-loss for the trade is triggered.

Here are the three most significant advantages of algorithmic trading:

Backtesting

Backtesting refers to the process of testing a trading strategy on the basis of historical data. This is done to ensure that a trading strategy actually works in the financial market.

Automated trading uses back testing a lot. Here traders’ backrest their strategies to find out if the strategy will work before they introduce it into their trades. However, there’s no strategy as a perfect trading strategy, but some are simply better than others, which gives traders a higher probability of success. Back testing helps in identifying good strategies to a certain extent.

Remove Emotions from Trading

When traders have a winning strategy that enables them to be successful in their trades, the next thing that needs to be done in execution of trades as per their plan. This is where algorithmic trading plays a significant role in the success of the strategy. As the saying goes, computer systems don’t have any feeling. They simply follow the instructions that are given to them by human creators, or in this case, traders.

Algorithmic trading focuses entirely on the execution of the strategy that has been set by the trader. The strategy doesn’t deviate. If it’s a good one, success should show. If it’s not, there will be losses. There is no place for human errors or emotions in the outcome.

Review & Refine Trading Strategies

As mentioned earlier, no trading strategy is perfect. Even a great trading strategy may fail the test of time when the market conditions go against it. This is the reason why it is important for traders to review & refine their strategies periodically, even if it’s working well.

With algorithmic trading software, traders can review the performance of their previous trades and how they’ve panned out and looked for ways to improve their strategies. 

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Created on Jan 15th 2020 02:07. Viewed 254 times.

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