Can you generate profit from algo trading strategies?

by Alpha Bot An automated trading system

If you’re a stock market investor or are thinking about becoming one, this question must have crossed your mind: do algo trading strategies help generate profit? If yes, then to what extent? And most importantly, should you or should you not opt for automated trading? In the article below, we’ll try to answer these important questions.

What you do when you employ algo trading strategies is that you have software where you enter certain algorithms to make trades. Those algorithms basically enable the computers to make decisions on their own in the best interest of the investor as per the prevailing market conditions.

The most important benefits of automated training is that you get to do high-speed trading that is more accurate and less emotion-based – which could be a case if you’re doing manual trading. If humans are left in charge of trading, regardless of how good they are at understanding market behaviour – they are biased in certain biological ways that aren’t very useful. For example, a human may sometimes get overwhelmed with greed if things are going good, and panic if things are going bad, which may result in making of impulsive decisions.

But if you go for algo trading, since it is such a sophisticated, powerful and unbiased system of trading, you end up with best outcomes. The only problem with algo trading is that you need to spend a substantial sum of money to set up your infrastructure. You also need to have a certain level of technical knowledge in order to write the algorithms and execute them correctly. But once you set up the system, you can reap great profits and quickly overcome your initial expenditure.

Now, to answer the question as to what extent is algo trading possible, we need to divide the investors into two separate categories and analyze them properly. Those two categories are institutional investors and retail investors. Let us study them briefly.

Benefits for Institutional Investors

For institutional investors, algo trading is exceptionally beneficial. The reason for this is that they have a substantial capital at their disposal. This essentially means that they can do a very high volume of trade; so even if their profits per trade aren’t too huge, the overall profits are magnified because of the sheer volume of trades. Also we need to consider the fact that the institutions pretty much have all the necessary infrastructure and resources that are essential to automated trading. They have the personnel who can write workable algorithms and they have the technical resources as well to set everything up nicely – therefore they are able to reap substantial benefits.

Benefits for Retail Investors

How beneficial algo trading is for the retail investors depends largely upon the competence of those investors. If a retail investor, for instance, has the technological acumen to be able write profitable algorithms and has a large reservoir of capital, then that investor can do well in algo trading. The problem however, is that without the large reservoir capital, which is the case with many investors, the trade volume is limited and the investor can generate only a certain amount of profit.

Moreover, the retail investors also have to pay the brokerage as well as transactional costs – which further lead to the reduction of profits. Yet, when you compare it to traditional manual trading, algo trading is still more beneficial as a higher volume of trades can be done in a much safer environment.   

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About Alpha Bot Junior   An automated trading system

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Joined APSense since, May 22nd, 2020, From New Delhi, India.

Created on May 27th 2020 04:47. Viewed 335 times.


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