Manual trading on the stock exchange, despite all its prospects and profitability, has slowly but surely become a thing of the past. Nowadays, only traders of the old school tend to trade manually, but beginners who are just learning the ropes are increasingly turning to automatic trading or, as it is otherwise known – algorithmic trading. This process consists of trusting the transaction making process to a dispassionate mechanism - a trading robot - which is free from emotion and does everything the developer has commanded it to do, without being distracted by external factors.
What is algo trading?
The trader, based on his experience in trading strategy, forms a system in which he prescribes the rules of opening and closing positions, the conditions upon which the market and asset are required to meet, as well as the general rules of money management.
One of the primary advantages of algorithmic trading is that it eliminates the risk of making decisions purely based on emotions, premonitions or intuition (which are often counterintuitive!). Such conditions can prevent one from adequately assessing the current market situation and making the right decision.
“To trade using mechanical systems” is another common expression used when describing what algorithmic trading does in terms of its primary function. .To implement algorithmic trading in practice, a trading robot is required, which is essentially a computer program, with complex algorithms written in order to independently execute transactions and other operations in the market.
Bot trading programs and strategies
Trading programs can be divided into two large groups:
- Those which do not have the authority to open positions independently. They instead analyze large volumes of information about current market conditions to give the trader the ability to independently decide when to open a position or not.
- Fully automated robots which do not ask for permission to open a trade. The program takes into account all market risks and possible losses.
When we talk about algorithmic trading we are primarily interested in the second type.
In addition to trading robots, algorithmic strategies in which they operate can be divided into two parts.
- Execution strategy – involves the purchase/sale of assets in large volumes at a weighted average price as close as possible to the price of the last transaction. It significantly reduces costs associated with opening and closing positions and is mainly used by large players in financial markets, such as brokerage companies and investment funds. Private investors often use the second strategy.
- Speculative strategy – a classic system for traders aimed at obtaining the maximum profit based on the price differences between purchase and sale price.
Algo Trading advantages
- High accuracy – the robot can not put an extra character after the decimal point, step aside from the planned price or open a deal at random. The robot will trade with exactly the sequence of actions it has been given, nothing else..
- The ability to profit from the very first day - Independent trading is complicated, requiring years of learning and experience, not to mention all the losses incurred while learning from mistakes.. Even beginners with a trading robot designed by more experienced traders can earn from the very start.
- Readiness to work - The experienced trader knows that sometimes it is necessary to wait for hours or even days in order to open a transaction. It is indeed very difficult. After all, even if one is constantly ready (which is extremely tedious) you could leave the desk for a couple of minutes and miss the very price you have been waiting on for a week. The program is constantly on the mark. It will patiently wait on schedule and will not affect the effectiveness of its actions.
- Speed - The system is able to analyze multiple charts, quotes and indicators at the same time, as well as send over a dozen of orders per second. The more transactions – the more profit.
- Lack of emotions – As stated previously, the program makes decisions which directly follow from the algorithm embedded within. It can't be in a hurry, lazy, hungry or afraid!
- Versatility and scalability – a good algorithm can be adapted to work with hundreds of different assets, currencies, stocks, futures and more. Its capabilities are directly derived from the abilities of the developer, therefore robots created by experienced traders can be adapted for any market or exchange. In addition, if necessary, they can be altered and improved, making the algorithm perfect for the trader’s needs.
Algo trading disadvantages
- Technological complexity - The process of algorithmic trading is simple: connect the program to the terminal and that is it. It is, however, very difficult to create. The market is unpredictable and few people have managed to create a perfect algorithm so far.
- High costs - This concerns only those who do not develop algorithms on their own and may purchase them from the professionals. If the bot has a successful track record, you will need to seriously fork out!
- No ability to improvise - One of the primary advantages of algorithmic trading is also its drawback. Financial markets are extremely volatile and the algorithm does not always adapt to the current circumstances. Whereas the trader, seeing the changes, can go against his strategy and benefit from it.
All the disadvantages come down to one thing – the complexity of creating a perfect robot. There are a myriad of factors which need to be taken into account in order to make profits consistently.
How to start trading with bots
First - A trading terminal and bot which will execute the transactions.
Second - a decent connection to the server, which would guarantee a minimum time delay. High-frequency trading involves making decisions within fractions of a second, and any delay here can be fatal.
The work on high-frequency systems is carried out with small volumes, which is compensated by an operations number. Traders who use this technology can make a profit instantly. And the size is often very rewarding..
Algorithmic trading as a whole is a broader concept. It can be both high-frequency and moderate.
Third - free access to quotes, preferably to be displayed directly in the working terminal. The program is able to analyze hundreds of assets simultaneously. The bot need to extract the maximum information, so the quotes should be taken care of in advance.
In summary, algorithmic trading is one of the most promising areas in trading to date.
Exchange trading constantly evolves. And algorithmic trading is naturally the next step for traders looking to benefit in such complicated markets.
The results achieved by bots, demonstrated by stock algorithms in recent years, is consistently beyond the capabilities of even the most experienced and advanced traders. So without a shadow of a doubt, we can be sure algorithmic trading will become a vital tool for the future of the industry.