Most people would agree that a stock market isan unpredictable place. The best traders can predict the direction of stocksand make a profit on their predictions. Algorithmic trading, also known as computer-generated algorithmic trading or Algo trading, uses computers to search for pre-programmed signals to execute trades more quickly than a human trader could do manually. Algo traders rely heavily on data analysis and statistics to identify trends and patterns that may lead to profitable transactions.
The fundamentals of Algo trading based onthree principles:
Algorithms identify trends and patterns whichmay lead to profitable transactions.
A trader must generate a profit from these algorithms using capital available for trading purposes (usually on margin).
The risks reduced because the decision-making process is automated, thus eliminating emotional interference in trading decisions.
Since its inception, algorithmic trading has become very popular among traders; as of 2010, about 75% of trades done with computers rather than humans. Algo Trading Systems provide significant benefits over human traders: they can analyze more data quicker, make split-second decisions without emotion interfering and execute large orders automatically at once. Algo systems have also shown to reduce risk significantly. The stakes get reduced because the decision-making process is automated, thus eliminating emotional interference in trading decisions.
Risks of algorithmic trading include high correlations between stocks that may not emerge until after initial investments made and fraud due to lack of transparency around algorithm code. However, with proper risk management steps taken, these two items should be manageable for most algorithmic strategies.
Algorithms created for both the buy andsell-side of trading positions, with each type having a different purpose in investment strategy. Online Algo systems can trade independently or optimize other traders' orders by using pre-programmed rules that decide when an order should occur based on market conditions.
A good algorithm has:
- Low transaction costs.
- Minimal loss due to slippage (the differencebetween what you want to pay for your stock and its eventual purchase price).
- Accurate profit/loss calculations withoutfalse signals from volatility spikes.
- High rates of return over periods selected byinvestors and few mistakes despite thousands of trades per day.
In conclusion, Algo trading can be used for a wide variety of purposes and is not limited to high-frequency traders. Algorithmic trading is the backbone of many successful businesses, including retail investors. If you've been considering using algorithmic trading as part of your portfolio strategy, contact Algorithmic Trading today!
Algorithmic Trading provides a collection of services that will encourage you to get started on this exciting journey. Their experts are ready to answer any questions or concerns you might have about how they work with their clients and their unique needs, so don't hesitate to reach out.
