What is algorithmic trading?
Algorithmic trading is a defined set of directions for placing a trade to be able to create profits in speed and frequency that’s not possible for a human dealer. It also accounts for many trading variables such as price, timing, and volume and used in a wide variety of situations including order execution, arbitrage, and trend trading strategies.
In terms of transaction rate, Algorithmic traders often make use of high-frequency trading technology that enables a firm to make tens of thousands of trades per second. Due to its automaton, algo-trading makes markets more liquid and trading more systematic by leaving out the impact of human emotions on trading activities.
Benefits of Algorithmic Trading
Algorithmic trading allows traders for faster and easier execution of orders, making it attractive for exchanges. It also allows trades to be timed correctly and avoid significant price changes. This, in turn, provides less risk of manual errors when placing trades and reduced transaction costs. Algorithmic trading is, in particular, are very useful for large order sizes that contain as much as 10% of the overall trading volume.
However, there are still some risks with algorithmic trading, such as system failure risks, network connectivity errors, time-lags between trade orders and execution, and, most importantly, imperfect algorithms.
There are general trading strategies used in algo-trading, such as Trend-following Strategies. These are the simplest strategies to implement through algorithmic trading because these strategies do not involve making any predictions or price forecasts. Trader can also use proven mathematical models that allow trading on a combination of options and the underlying security.
At the present time, Algorithmic trading is amongst the most hyped technologies in recent years. It has given trader and trading firms more power by eliminating human errors and changing the way financial markets are interlinked today. The trading of the future will be based on so many technological innovations that we cannot imagine. It would definitely be worth the wait to see where we stand in terms of trading in the future.