Evolution of Algorithmic Technology
What is Algorithmic Technology?
Algorithmic trading is also known as automated trading, black-box trading, and algo trading.
In this trading, we use a computer program that follows a specific or prepared set of instructions. In this trading system, we can gain profit at a high speed. The algorithmic instructions include timing, price, quality, or mathematical models. Instead of profit opportunities, algo trading helps the market more liquid and trading systematically by following algo trading activities.
Outcomes of Algorithmic Trading:
1: It combines computer programming and the financial market to execute trades based on predetermined plans at precise times.
2: It tries to cover the circumstances of traders and how they can deal at once.
3: Trend tracking, arbitrage possibilities, and index fund rebalancing are common trading techniques.
4: To get started with this trading, you must have the accessories of a computer network, financial market expertise, and coding talents.
How Algorithmic Trading Works:
Algo trading determines how to buy and sell rules based on market data. Algo trading connects online exchanges, brokers, or data sources for receiving price data and placing orders. A backtesting method for determining the expected trading profits of the algo trading is the most profitable of all.
All the methods of algorithmic trading need to make sure of the benefits of market inefficiency. Generally, estimating the price and general direction is establishing an advantage. The inefficiency of the market causes price cures, and results are unexpected. So, all traders should have to know how to decline rationally and act immediately.
The price moves in a hypothetical market. It would be a pure random walk. These movements contain no information to estimate future prices.
Basically, for algo trading strategies, there are no theoretical ideas in the market. There are many examples of market inefficiencies; everyone likes slow reactions to news as incomplete information, rumours, and irrational trading are some examples of market models. If a trader follows these simple trade methods or principles:
First, when a stock’s 25-day moving average surpasses its 100-day moving average, buy 25 shares of the stock. A moving average is an average of past data points that disentangle day-to-day price moving levels and trends.
Secondly, sell shares of stock whose 25-day moving average goes below the 100-day moving average.
By following these two tools, a computer program will automatically monitor the stock price. It also helps in selling and buying orders and the best time to trade. The algo trading system also helps the correct identification of trading opportunities automatically.
Advantages of Algorithmic Trading:
Following are some advantages of algo trading:
1: In algorithmic trading, many times, the price can be executed. We can say it is the best execution.
2: In this trading, the order placement is instant and exact. The process of activity in this trading is measured correctly to neglect the significant price changes.
3: Decrease the transaction costs.
4: Simultaneously automated checks in many of the involving market positions.
5: It reduces manual errors or mistakes when placing trades and the tendency to be swayed by psychological factors.
6:This trading backtested of historical and present data is it capable trading strategy.
Disadvantages of Algorithmic Trading:
Where there are some advantages of algo trading, there are also some disadvantages of algo trading, as follows:
1: Algo trading is a fast-speed trading system that is not considered perfect. If trade is not executed quickly, it may result in losses.
2: This trading system depends on the past time or historical data and mathematical models to apply in future market movements, which can result in losses of traders.
3: Algo trading has a specific impact on market prices. And the Traders who did not have any experience with this were suspected of increasing market volatility at times. They have to face the losses
4: It is a very costly trading system, and all the traders can not pay ongoing dues for software and data.
5: The Algo trading system is based on predefined rules, which can limit the traders’ ability, and they have to meet their particular preferences.
6: Algo trading is a limited past model data; the traders can not expose their ability freely. It also caused a lack of human judgment in trading.
Any strategy for algorithmic trading needs identified opportunities. In terms of raising profits, that is advantageous. It allows traders to perform high-frequency trades. It is legal trading. However, where there are some advantages, on the other hand, there are some disadvantages, as discussed above. It depends upon the trader’s mind and ability to rely upon it.