Is Algorithmic Trading RIght for You?

by Alpha Bot An automated trading system

Introduction

The stock market is always buzzing with activity. Trading is all about a keen eye for the ups and downs of the market. Investing in stocks requires knowledge, speed, and flexibility, among several different things.

There are new methods to achieve more profit from the stock market, such as Algo Trading. The basis of Algo trading is cashing on the hidden and quickly emerging patterns in trading which human being can miss. Machines can be programmed to read previous designs and read quickly emerging ones, thus bringing out the opportunities to trade profitably.

One of the reasons as well for its emerging popularity can be that earning is much more through algo trading than trading manually. Before jumping into the question of ‘Is Algo Trading right for you?’ it is necessary to understand the basics. We’ll cover a few terminologies here and then go further to answer the question.

Algorithm Trading:

Let’s start with understanding the term- Algo Trading.

Algo is short for the Algorithm. The steps you perform to achieve the desired result as an Algorithm. You set these instructions for the machine to process and execute. Trading is the transaction of stocks. To summarise, algo trading is when you define an algorithm to the machine for selling and buying shares. The Algorithm will be implemented when the conditions specified for the transaction are met.

How can Algo Trading be helpful?

Different aspects play an essential role in the buying and selling of stocks. Some of the causes of loss in the stock market can be:

Inconsistency in decision making
Inadequate analysis of the market
Little to no knowledge about the current market scenario, etc.

This is where algo trading strategies can help.

The psychological aspects of stock trading can be controlled through the algo trading strategies. A machine doesn’t have any emotional inclination. Thus it can strictly follow the consistent trading system instructions. Also, there isn’t any comparison between the speed and frequency of a human and a machine.

Algorithm trading and Intraday Trading Strategies:

The algorithm trading works exceptionally well when used with intraday trading strategies. Intraday trading revolves around buying and selling stocks within the time limit of the market for the day. These are short-term trades and are for gaining considerable profits from the market at a given point of time in the day.

Intraday trading strategies differ depending on market conditions. Intraday traders need to be quick. Speed and knowledge about the market are crucial factors in intraday trading. This is where algo trading comes into play. The machine can process and execute the steps for the transaction at a much quicker pace than a human trader.

Are algo trading and automated trading the same?

Algo trading can either be semi-automated or completely automated, according to the choice of the human trader. Thus, people often use automated trading and algorithm trading interchangeably. However, both terms are not necessarily the same.

Algorithm trading is when the execution of the process is done based on the set of written instructions (or Algorithm). On the contrary, automated trading is the complete automation of the buying and selling process of stocks. Thus, the creation, submission, and execution of the order are entirely automated.

Advantages of Algo Trading:

Now, coming back to our initial question of ‘Is Algo Trading right for you?’ To know if something is beneficial or not, we must weigh its pros and cons.

There are many pros of Algorithm trading, which outweigh the cons by a significant margin. The advantages usually cover the aspects which are the contributing factors in the thriving trading process:

· Speed

When doing Algorithm trading, algorithms are pre-written, and the instructions can be executed automatically. The analysis can be done at a faster speed, thus providing better opportunities. The machine, with the help of the Algorithm, can scan and implement different factors at a crucially fast pace.

Accuracy

In any business or trade, accuracy is the key to achieve successful results. Similarly, in algorithm trading, skill is essential. With the incorporation of machines in the trading process, common human errors are reduced.

When a person is trading manually, many of his judgments can be a result of greed or fear. But in the case of machines, there is no room for such an error. The device strictly follows the Algorithm to process the transaction.

To trade accurately, you can backtest the trading algorithm. Backtesting the trading algorithm is running the created Algorithm through the previously present data and studying its performance. In simple words, how viable the trading strategy is against historical data.

Reduced Costs

You don’t need to supervise the market continuously. The trading process functions without it with the help of an algorithm. Also, there isn’t any risk of losing your revenue. You have a lot more time to do other things as the time spent on supervising the markets is less.