Before we understand the advantages of algo trading, let’s understand what algo trading is all about. Algorithmic trading (also known as black-box trading, automated trading, or simply algo trading) is the technique of employing computers programmed to follow a defined set of instructions to trade at a pace and frequency to generate profits which are impossible for any human trader. Any algo trading strategy requires an identified opportunity that is profitable in terms of increased earnings or reduction in costs.
Trading is the game of probabilities. You don’t have to be right every time. You just have to follow your rules.
Algo trading strategies follow defined sets of rules and are based on time, price, volume or any mathematical model. In addition to profit opportunities for the trader, algorithmic trading makes markets more liquid and trading more systematic by removing human emotional influences on trading activity.
Advantages of Algo Trading
There are many Advantages of Algo Trading; let’s understand some of them:
1. Trades are carried out at the best possible prices.
2. Instant and accurate trade order placement.
3. Time the trades correctly and promptly. It avoids significant price changes.
4. Reduction in transaction cost due to lack of human intervention.
5. Automatic checking and monitoring of multiple market positions at the same time.
6. The risk of manual errors in placing trades reduces significantly.
7. Less prone to mistakes by human traders based on emotional and psychological factors.
8. The largest segment of current algorithmic trading is High-Frequency Trading (HFT). The MeaninThis trading method attempts to place a large number of orders at very high speed, in multiple markets, and on numerous decision parameters, based on pre-programmed instructions. Algo trading meaning, offers numerous advantages. It enables the swift execution of complex strategies, minimizes emotional bias, enhances precision, and allows 24/7 market monitoring.
Implementation of Algo Trading
Algo trading can be implemented in several forms of trading and investment activities:
Medium to long-term investors or buy-side firms (pension funds, mutual funds, insurance companies) who buy large amounts of stock but do not want to influence stock prices with discrete, large amounts of investment.
Short-term traders and sell-side participants (market makers, speculators and arbitrageurs) benefit from automated trade execution; Furthermore, algorithmic trading helps create enough liquidity for sellers in the market.
Systematic traders (pairs traders, trend followers, hedge funds, etc.) find it more efficient to program their trading rules and have the program trade automatically.
Automated trading is a more methodical approach to active trading which is based on human traders’ intuition or instinct. The advantages of algo trading definitely bring an edge over manual trading.