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Disadvantages of Algo Trading

disadvantages of algo trading

By now, you might already have knowledge about what algo trading is, its concept, and its advantages, but if you’re still confused, then you can read this blog to get more clarification. And by the end of this blog, you’ll learn about all the disadvantages of algo trading and the answer to your question of whether you should invest in algo trading or not.

Disadvantages of Algo Trading

While algo trading is full of positive points, there are some disadvantages of algo trading too.

  • Complete Dependency on Technology: One of the most significant disadvantages of algo trading is that it is entirely dependent on technology. Suppose the trade process is happening on the computer and not on the web server, and due to painful conditions like loss of internet connection or power supply, then the trade will not be sent for execution. It is the opposite of what we use algo trading for; with these issues, traders can lose a big chunk of money due to their total dependency on technology.
  • Knowledge of Coding and Programming: Algo trading is not for those who don’t want any expert’s help and want to DIY without having any prior knowledge of complex algorithms and coding. To create your trading algorithm, you need extensive knowledge of programming languages such as python, C+, C++, java, and so on. Getting your algo trading code and strategies done by a leading industry expert is a great option.
  • The Risk of Over-Optimization: Another disadvantage of algo trading is that there is a high probability that the strategies formed during the process might not perform as expected during live trading. Despite systems being built on historical data and multiple cross-checks, there’s a high chance that the system might fall down due to poor implementation and several other circumstances.
  • Need for Constant Monitoring: Programs in algo trading are completely automated but still require to be constantly monitored by the trader to look for any anomaly or technical issues like loss of internet connection, system or server crash, power loss, etc. In the early stages of execution, the algorithms need to be constantly monitored to check if the program is functioning properly to ensure there are no missing orders or wrong execution of trade orders. However, after successful implementation, you don’t necessarily need to stick around to your computer; you can monitor it from anywhere using your smartphone every few hours, although it can be one of the significant disadvantages of algo trading for some people.
  • Requirement of Resources: While algo trading reduces transaction costs by a huge percentage but also adds a lot of expenses on resources required for successful algo trading. The traders need to have high-end systems and servers that can process data in a fraction of second and build algorithms from scratch according to each person’s unique strategy and goals. That is one of the significant disadvantages of algo trading for people who cannot manage all these resources..
  • Rational Automation of Strategies: One of the cons of algorithm trading is that not all strategies can be automated. There are some excellent strategies available, but sometimes, not every type of strategy can be successfully implemented, which reduces the chances of making high profits.
  • Government Regulations: There are some rules and regulations regarding algo trading in every country and you should keep them in mind before starting.
  • Lack of Human Control: Algo trading is completely automated and leaves no space for human control, which is a positive side but also serves as a disadvantage too. Once the trade or order is executed, there is no way to stop it and control the losses. Even if the trader realizes before the execution that the strategy will fail to serve the goals, there is no possible way to stop particular trades. 
  • Faulty Algorithms: Algorithms work at an unimaginably high speed which means one faulty algorithm or code can make huge losses in a very short span of time, and by the time you realize it, it might be too late for anyone to revert it. Unfortunately, the super speed and efficiency of algorithms which we think of as an advantage can be a huge problem for some people.

The Bottom Line – Disadvantages of Algo Trading

Algo trading is a very effective and efficient method of trading but has some disadvantages too, and you can face the risk of financial losses if you’re thinking about algo trading without seeking any expert advice or help. Therefore, seeking help from experts, constant cross-checks on algorithms, and proper testing before the execution of live trade is highly recommended.

Now that you have learned about all the disadvantages of algo trading, It is now in your hands how you want to get started with algorithmic trading.