In the past years, the algorithmic trading has definitely increased. This helps in improving such market quality and should this be encouraged? There are many of those who say that algo trading would help to improve the liquidity as well as it boosts the informativeness of such prices and quotes.
One reason why that algorithmic trading has surely become very popular is due to the benefits that it holds on trading manually. The advantages of algo trading are actually related to speed, accuracy and also minimized costs. Since the algorithms were written in advance and they were executed manually, then the primary advantage is speed. The speed wherein those trades are made is actually measured in just fractions of a second and this is much faster than what those humans actually perceive.
The algorithm actually has the benefit of scanning and executing on various indicators at a speed which no human has done. Since trades are analyzed and done in a faster way, then you can have more opportunities and they are being offered at better costs.
What you can also get from algo trading is accuracy. When the computer is automatically doing a certain trade, then you would be able to avoid such pitfalls of accidentally placing in the wrong trade associated with those human trades. In manual entries, there would be a higher chance of buying such wrong currency pair or that wrong amount unlike the computer algorithm that was double checked to be sure that there is really a correct order that is entered.
One of the largest benefits of algo trading is such ability to remove human emotion from those markets, trades which are constrained in a set of predefined criteria. One great reason why such is really a benefit is the fact that a human trading would be prone to a lot of emotions and this would cause irrational decisions. Also, the two emotions which may cause poor decision but the algo traders are not exposed to are greed and fear.
Being able to backtest is also a benefit from algo trading. It can be difficult for the traders to know the parts of the trading system work and what doesn’t work because they cannot run their system on previous data. In algo-trading, you may run the algorithms according to previous data so that you can see if this really worked before. This kind of ability would give you a huge advantage because this allows the user to eliminate any flaws of the trading system prior to running such live.
One excellent benefit that you can have from automated trading is the reduced transaction cost.