The Global Algorithmic Trading Market Report states that the algorithmic trading market is increasing at a compound annual growth rate (CAGR) of almost 10.3% from 2016 to 2020. Presently, more than 75% of the trades performed globally are automated, and algorithmic trading contributes to a significant part of it.
With the technological advancement in financial market applications, high-frequency trading and algorithmic trading are being accepted by markets all around the world. In a decade, it has become one of the most common means of trading in the developed exchanges and is quickly growing in the developing economies as well.
Algorithmic trading, also known as algo-trading, automated trading, or black-box trading, is the process of utilising programmed applications, which follow a determined set of instructions (an algorithm). This is done for putting a trade to make profits at a frequency and speed that is impracticable for a human trader. The determined sets of instructions are based on price, timing, quantity or any analytical pattern.
Besides generating profitable events for the trader, algorithmic trading makes the buying-selling process more systematic by omitting any influence of human emotions on trading actions.
Benefits of Algorithmic Trading
Traditional investment institutions and brokerage firms are developing tech-savvy algorithm applications and platforms to participate in the global market. Aside from the return on investments, algorithm trading also provides market intelligence which comes handy to take long-term trading settlements. All there reasons have made algorithmic trading more popular because you tend to earn more with it as opposed to trading manually.
Let’s take a look at some of the benefits of investment with algorithmic trading.
Backtesting
The process of examining a trading technique based on authentic information to ensure that an investment strategy will work in the market is known as backtesting. Algorithmic trading utilises backtesting to a great extent wherein traders apply precise sets of commands and test them on factual data before venturing capital in live trading.
Backtesting enables traders to assess and fine-tune a trading approach and to ascertain the method’s likelihood to gain profit, i.e., the exact value that an investor may win or lose per unit of risk.
Minimises Human Sentiments
Algorithmic trading reduces human sentiments during the entire trading process. By using algo-trading and managing certain emotions such as anxiety and greed, investors can stick to a specific plan with no bias and makes the process easier.
Considering that the trades are performed automatically after meeting every trade rule, investors will not be able to stop or doubt the trade. Moreover, algorithmic trading can help traders curb overtrading (purchasing and selling at every opportunity).
Disciplined Trading Process
When the established trade rules are followed, and the trade is executed in an automated manner, control is maintained even in unstable markets. Some traders often lose trade discipline due to factors such as fear of losing, or the inclination to earn more profit from a particular trade.
Algorithmic trading ensures that the trading plan is followed precisely, and errors are minimised. For instance, if you want to sell 500 shares, it will not be incorrectly entered as an order to purchase 500 shares.
Optimise
When it comes to trading, one of the biggest hurdles is to design the trade and optimise it accordingly. In the case where a trading plan has the potential to be a successful one, investors who overlook the set rules are limiting their chances of winning. But with algorithmic trading, investors can evaluate the performance of their former trade strategies and find useful ways to improve their strategies.
This process also permits them to recognise trends such as how and why certain trades do well during a particular time of the day, or with specific currency sets. This may optimise trade opportunities to help pick what works best for your trading approach.
Diversification
Algorithmic trading allows the investor to trade various accounts or various strategies at the same time. This has the potential to increase the risk factor, but algo-trading strategically utilises the algorithms to balance the risk of any unfavourable price movements.
A machine efficiently performs details that are challenging for a human to accomplish in seconds. Since the computer can analyse across a variety of markets, produce orders, and monitor trades, the work is done at a faster speed, and an investor gets a better opportunity to diversify his trading.
No Constant Monitoring Required
Since algorithms control the trades, investors don’t have to spend time checking the markets as trading can be performed without any supervision. The time spent on monitoring the exchange is drastically decreased and gives you the chance to engage in diverse trading activities. For more information, visit this website.
We can conclude that algorithm trading can increase the profits of every trader and also provide accuracy, speed, and sound market insights. However, it is also necessary to develop high-tech algorithms with maximum efficiency and implement top-notch security measures to protect it from cyber-attacks.
Nisha Pandey
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