Trading has changed dramatically in the last decade. Gone are the days when traders only relied on intuition and gut as a method of success. Nowadays, the most successful traders leverage technology to give them the advantage they need to thrive. This is known as algorithmic trading and is radically changing how people engage in financial markets. Whether you are a novice trader or an advanced investor, doing so can lead to better trading.
What is Algorithmic Trading?
Algorithmic trading is a method of executing orders automatically using programmed instructions (algorithms). You can think of algorithms like a set of rules that a computer program follows to place orders and manage trades. The algorithm handles the buying and selling, rather than relying on a human being to manually watch the charts, then decide to place a buy or sell order (by clicking the mouse button). The programmed instructions are based on many aspects of trading, such as time, price, volume, and, more importantly, strategies.
All of this is also known as automated trading or algo trading. It has become a dominant method in the financial industry, with many exchanges' total trading volume being executed by such systems.
How Algorithmic Trading Works?
Algorithmic trading incorporates three essential components: the algorithm, the bot, and the feed.
The algorithm (brain): The algorithm is essentially the "brain" of the operation. The algorithm is a set of rules (usually based on either technical analysis or quantitative analysis) telling the system when to buy, sell, or hold. For example, a basic trend-following algorithm could potentially be written to "buy when the 50-day moving average crosses over the 200-day moving average" and "sell when the opposite occurs." Although this is a very straightforward example, sophisticated algorithms use complex mathematical models and could incorporate news / media / social sentiment. If you're looking to understand a specific technical indicator, the MACD indicator is one of the most prominent indicators that is used by many traders.
The bot (the executor): The bot is the software that executes the instructions from the algorithm. The bot is directly connected to the exchange, so it places the orders without any human interaction. This is the main advantage of algorithmic trading as a fast method of trading.
The feed (data to process): The necessary constant and real-time market data not only enables the system to function, but also includes prices, volumes, and other relevant indicators. The algorithm analyzes all this data (ideally) at once, in real-time, to find trading opportunities based on its "rules".
Five Key Ways Algorithmic Trading Makes You a Better Trader
By automating the trading process, you gain significant advantages that are nearly impossible to achieve through manual trading alone.
Eliminate Emotional Bias: One factor that presents serious problems for any trader is dealing with human emotions such as fear and greed. Emotions cloud judgment and can lead to hasty and emotionally driven decisions that could wipe out any profits instantly. Algorithmic trading leaves no room for either emotion when executing trades, meaning each and every trade is borne purely as a result of logic and your pre-defined rules. If you want to learn more about how to manage emotions while trading, our Emotion Controlling in Stock Market Trading course can provide valuable insights.
Unparalleled Speed and Efficiency: When it comes to fast-moving markets, speed is of the essence, and an algo can execute a trade in milliseconds, something a human trader simply does not have the ability to do. This means that you can execute trades for fleeting opportunities, orders of size, with very little market impact as well.
Discipline and Consistency: Humans acting as manual traders can stray from our strategies and rules, but algorithms have no fear or greed. Algorithms exhibit perfect discipline and allow your strategies to be executed consistently day or night.
The Power of Backtesting: Algorithmic trading systems all allow you to test your strategies against historical data before actually risking any real capital. The process of backtesting allows you to see how a strategy will have performed historically. Backtesting is a very serious and important step that will ultimately sharpen your strategies and build confidence in your system. You can check the Top 10 Paper Trading Apps In India to improve your trading skills.
Simultaneously Trade Multiple Markets: A computer can simultaneously monitor and trade in multiple markets and asset classes. Computers (trading bots) can let you manage your portfolio and risk as a trader much more effectively than manual trading.
Algorithmic Trading vs. Manual Trading
While manual trading still has its place, it's essential to understand the key differences.
Conclusion
Algorithmic trading isn't a fad; it's the next step in trading. If you embrace and utilize the use of solely computers to adaptively optimize your trading, you can eliminate a lot of the human bias, boost your speed and efficiency, and actually have a level of discipline that is almost impossible for a human to maintain. Algorithmic trading can make you a more objective, systematic, and therefore profitable trader. Like all types of trading, it requires education, an understanding of potential pitfalls with risk, etc., but for those willing to invest their time to learn algorithmic trading, it will become one of the greatest trading tools. If you're a beginner looking for a comprehensive overview of the stock market and trading, consider our Stock Market Trading Beginners Course.
.jpg)
.jpg)
.jpg)
.jpg)
.jpg)
.jpg)
.jpg)
