There are many different options for traders today. From the variety of stocks and shares to the various trading platforms, there are a lot of key decisions you need to make along your journey. One of your pivotal decisions is whether to opt for human trading or automated trading. In this blog post, you will discover everything you need to know about algorithmic trading.
What is algorithmic trading?
Algorithmic trading is also known as algo trading, black box trading, and automated trading. It involves utilising computers that are programmed to follow a set of instructions that have been pre-defined, i.e. an algorithm. These instructions are followed for placing a trade so that profits can be generated at a frequency and speed that is not possible by a human trader. The rules in place will be based on quantity, price, timing and any mathematical model. A lot of people prefer algorithmic trading to human trading because it eliminates human emotions and errors. You can input the instructions that the trades will be based on, so you can make sure that your trading plan is followed.
What are the benefits associated with algorithmic trading?
There are a number of different benefits that are associated with this approach to making a trade. So, let’s take a look at them in further detail…
- The possibility of making a mistake is eradicated. Mistakes are easy to make when a person is in control because psychological and emotional factors come into play. Plus, we have all been there when we have made a stupid typo and it has cost us money!
- This type of trading can be back-tested based on real-time data and historical data.
- There can be a number of different automated checks conducted on various market conditions are the same time.
- Transaction costs are reduced.
- Trades are time instantly and correctly. This means that significant price changes are avoided. Again, this is something that humans cannot do.
- Accurate and instant trade order placement.
- Trades executed at the best possible prices.
Technical requirements for this type of trading
If you are going to follow this approach to trading, the following will be required:
- Available historical data for backtesting
- The infrastructure and ability to back-test the system
- Access to market data feeds
- Network connectivity
- Computer-programming knowledge
Hopefully, you now have a better understanding regarding what algorithmic trading is and the benefits that are associated with it. While there are clear advantages, there is no right or wrong answer when it comes to choosing a trading approach. It is all about choosing the right solution for you. If you are looking for something that offers great speed and takes the emotions out of trading (if you are susceptible to this), then algorithmic trading could be just the thing for you.
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