What is Algorithm Trading

Nowadays our life is dominated by algorithms in the form of traffic regulating lights, social media news feed, train schedules etc. More than 60 % of traders are actually using Algorithm Trading. The algorithms are redesigning the traditional stocks trade as well. The past decade has witnessed noticeable increase in popularity in Algorithm Trading.

The trade of a security applying some specific rules derived from historical information. It is an innovative type of trade that allows a computer program to follow a specific set of rules. This set of instructions includes certain criteria for variables like time of trade, volume and size of order, price etc. After analyzing the variables the computer program ultimately executes a trade on its own. It uses complicated mathematical and statistical formulas for decision making. Obviously it saves you from mental fatigue.

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Deep Learning or Artificial Intelligence:

Similarly advancement in Artificial Intelligence has also played a vital role in the ever-increasing popularity of Algorithm Trading. Deep learning is another huge step in this regard. The process in which computer programmers develop program that can enhance, improve and boost itself. You can make your investment more profitable by paying special attention to deep learning.

Advantages of Algorithm Trading

It is mostly used by high profile trading firms. It is particularly profitable and beneficial for large scale orders. Institutional investors also make its extensive use to minimize the trading cost. It is streamlined process and serves for a number of purposes such as to create liquidity or to reduce the trading cost etc. Some prominent and attention grabbing advantages of algorithm trading are:

  • Faster execution of order
  • Easier trade
  • Rapidly and efficiently booking profits off minor fluctuations in price
  • Trade of securities at limited and meager price increments
  • Error free
  • Free from disturbing emotions
  • Less stressful
  • Less trading cost
  • Effective and efficient capability and expertise to Backtest
  • Diversification
  • Consistency
  • Discipline in trade
  • Improves market quality and makes market broader

Disadvantages of Algorithm Trading

Although Algorithm Trading is very beneficial and it has many advantages. It does not mean that it has no disadvantage. Like all other sources of income and trading systems, it also has a dark side and some disadvantages as well.

  • Too much dependence on technology
  • Lack of control of traders
  • Constant monitoring
  • Knowledge of programming process(technical skills)
  • Chances of over-optimization
  • Needs high- end resources
  • Lack of consensus results in a lot of regulations
  • Loses control in extreme fluctuations and irrational market conditions
  • Precise life span

Thus you need to constantly monitor it so that you may never miss a good opportunity. Like all other trading systems, it also has some pitfalls but hard work in algorithm trading ensures huge profit, just like the saying goes “hard work pays off”.

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