Flashy cars, expensive suits and supermodels. Ah yes, the world of trading used to seem so glamorous, didn’t it? Unfortunately those of us who are actually involved know the reality doesn’t match up to this. Instead it’s often long caffeine-fuelled hours of data analysis, on-the-spot calls using mobile technology, and searching for programs that might be able to shave a second off your trade execution time.
Yes, times have changed and so has trading. How exactly are you supposed to stay on top in this digital age? The answer is by using that very same technology to your benefit. One way to do this is algorithmic trading.
What is Algorithmic Trading?
Algorithmic trading is done by a pre-written computer program. It follows a set mathematical formula to execute trades at any time, limited only by trading times of the market itself. The advantage of using a program is that it can execute these trades much faster than a human can. It will also be constantly checking, so any trade openings are picked up and utilized in moments, sometimes taking less than seconds!
What Are the Benefits?
The main benefits should be obvious – the program can trade faster and more effectively than you can. It can also trade more often as there’s no need to physically check prices. A program can take in and interpret a massive amount of data almost immediately, compared to the human brain.
Some other advantages include reducing the chance of mistakes being made and removing human emotion from the equation. Doing this often results in better returns because trades are executed in the most statistically efficient way possible, rather than being executed when you feel it’s the right time.
There can also be reduced costs thanks to algorithms trading only when it’s to your advantage. If prices are going up suddenly, the amount of buying from your account will rapidly slow down to match that situation. When prices of your chosen product fall, buying will increase, keeping your costs lower and profits higher.
There are of course many other advantages to algorithmic trading as well. Of course different providers/platforms have different strengths and weaknesses, so you may not actually gain an advantage in all of these areas. Likewise some providers may bring you better advantages than others, so be sure to check properly before signing up!
Is Algorithmic Trading Easy?
No, it’s not. This isn’t a get-rich-quick scheme, it still requires knowledge and work. Only then can you have your algorithms set for the best possible returns. Many people ask the question: how does algorithmic trading work? Once you get to grips with it, you’ll be able to use the statistics to create your own algorithms!
From here it’s a case of running the algorithm and collecting data on how well it works. You can use this feedback to tweak your settings and maximize returns. This is the area you need to stay on top of, as if your algorithm starts giving bad results due to market changes, you have to spot is as soon as possible and make the required changes. Overall this gives you a way to save time and execute more overall trades, because your time is invested in the data analysis side of things and algorithm tweaking, rather than manual trading.