What You Should Know Regarding Algorithmic Trading
In the past years, the algorithmic trading has definitely increased. Does this help in improving the market quality and should you encourage this? 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 benefits of such algo trading are related to accuracy, speed and also reduced costs. Since the algorithms were written in advance and they were executed manually, then the primary advantage is speed. Speed in which the different trades are done is being measured in just fractions of a second which is much faster than what the humans can perceive.
Such algorithm has such benefit of scanning as well as executing on different indicators at a speed and which is far from what human can do. Since trades are analyzed and done in a faster way, then you can have more opportunities and they are being offered at better costs.
Also, a benefit to such algo trading is accuracy. If the computer is robotically executing a particular trade, then you could avoid the drawbacks of accidentally putting in the wrong trade which is associated with such human trades. With the manual entries, it is more likely that you would buy the wrong currency pair or that wrong amount unlike the computer algorithm that has been double checked to make sure that a correct order is being 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. A reason why this is one advantage is due to the reason that the human trading is prone to emotions that can result to irrational decisions. Such two emotions which lead to poor decision which algo traders are not susceptible to are greed and fear.
What you can also get from algo trading is that chance to back test. It can be hard for such traders to know the parts of the trading system that work and what doesn’t work since they can’t run their system on past data. With algo-trading, you can surely run the algorithms based on past data to be able to see if such worked in the past. Such type of ability would surely give you that big advantage since this permits the user to avoid the flaws of such trading system before running this live.
A great benefit that you can get from automated trading is such reduced transaction costs.