What is Algo Trading?
Algo trading is the process of placing orders using an automated and pre-programmed set of rules for trading that accounts for variables like volume, time, and price. This type of trading method aims to take advantage of the speed and computational resources of the modern era compared to human beings, which are behind in this race by a significant difference.
With the advancement in technology, Algo trading is gaining traction and popularity with both institutional and retail traders. It is being widely used by large sectors like mutual funds, and investment bankers where it is required to execute a large number of orders or a place where you need to perform multiple trades rapidly, which is solely not possible by human traders and a recent study in 2019 also showed that 92% of the trading in the forex market is being performed by trading algorithms instead of humans to get the maximum results.
Benefits of Algo Trading
Here are some benefits that you can get with Algorithmic Trading.
- Every trade gets executed at the best possible rate with the help of programming.
- The placement of trade orders is instant and requires no human intervention.
- Each trade gets timed precisely to tackle any price changes and fluctuations.
- Reduced transaction costs.
- Extensively reduces the risk of human-made errors while placing manual orders.
- Algo trading always gets backtested using historical and real-time data to check if the available trading strategy will be successful or not.
- Reduces the risk of making wrong trading decisions due to human emotions.
- Complete automated checks on market conditions with the help of artificial intelligence and several other computing instructions.
Disadvantages of Algorithmic Trading
Algo trading has several benefits, but there are some downfalls too that every trader and investor needs to be aware of.
- The biggest con of Algorithmic trading is that it is entirely dependent on technology, and any failure in technology will lead to a complete stop in trading.
- This type of trading is automated and has no human control, leaving no room for people who want power in their hands.
- In the early stages, it requires constant monitoring to checkout for any loopholes in strategy or to see if the algorithm is working at its full potential.
- Consistent creation of new strategies is needed depending on the market situation.
- It is beneficial in the long term but requires a lot of high-end and expensive resources, which you need to consider if you are thinking about doing algo trading on your own.
Growth Rate of Algorithmic Trading
Growing demand for software and artificial intelligence-based tools is increasing the growth of algorithm-based trading in the market. These algorithms help adapt to changing market conditions quickly while learning from experiences and making trades accordingly. According to a recent study global algo trading market is witnessing significant growth in 2019-2027. According to Coherent Market Insights, the cloud computing market has grown from US$ 58 billion in 2013 to US$ 191 billion by 2020, and the professional cloud services market has expected to grow from US$ 15.36 billion in 2017 to US$ 41.59 billion by 2023. Hence, increasing adoption of cloud-based services is expected to attract more growth in the algorithmic trading market.
5 Useful Tips You Need To Keep In Mind Before Starting Algo Trading
- Risk Management is the key to success.
- Always paper trade before doing live trading.
- Stay updated with the latest technology in algo trading and marketing techniques.
- Be consistent with systematically backtesting.
- Invest 60%-70% of your time in developing foolproof strategies.
The Bottom Line
This trading brings the high-speed computing power of computers and the knowledge and experience of humans together to make trades based on a programmed code. Traders and investors can choose what strategy fits best according to their goals while also leveraging computing power to do multiple tasks simultaneously. To begin with, algo trading, get started with computer hardware, programming skills, and financial market experience, or get in touch with us to get rid of this hustle.