Algorithmic trading (or simply algo trading) is a trading method that uses a computer program to calculate the price, quantity, timing and other characteristics of an order according to a defined set of instructions or rules. In other words, trading signals (buy or sell decisions) are generated based on a set of instructions.
Algorithmic trading has become more and more popular over the last few years due to the following features:
- remove emotion from decision making
- make transactions faster
- Execute more trades simultaneously
Therefore, algorithmic trading has many advantages. Algorithmic trading can also be used for high-frequency trading, where many trades are made in a short period of time. Other benefits include better risk management and increased liquidity.
As the title suggests, this blog will explain why you should do algorithmic trading.
In this blog, we cover the following topics to delve deeper into the discussion and explore why you should be doing algorithmic trading:
Algorithmic and manual trading
Whether algo trading (algorithmic trading) is better than manual trading depends on various factors and personal preferences. Undoubtedly, algorithmic trading has some advantages. Here are some points you should consider why algorithmic trading is better than manual trading.
|
manual trade |
algorithmic trading |
|
Manual execution of the trade at the current price is done |
Trading is executed by pre-defined rules and parameters coded in programming languages |
|
Transactions are executed at human speed, but not very fast |
Trades are timed correctly to avoid large price fluctuations and losses |
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It is impossible to manually scan different markets simultaneously to find the financial instruments that offer the highest profit potential. |
It is possible to scan different markets at the same time and trade multiple commodities at the same time. |
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Backtesting a trading strategy manually is not as efficient as using an automated system with algorithms. |
Easy to backtest |
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Human emotions can lead to wrong decisions regarding trading strategies |
The system is populated with pre-defined rules and strategies based on logic, so there is no risk of emotions hijacking decision-making power. |
Key takeaways from the table
- Speed and Efficiency: Algo trading automatically executes trades based on predefined rules, allowing you to execute trades faster. This is especially beneficial in fast-moving markets where timely execution is critical.
- Elimination of human emotions: Algo trading removes emotional bias from decision making as trades are executed based on predefined algorithms. Emotional decisions can often lead to bad trading results.
- Backtesting and optimization: Algo trading systems can be backtested using historical data to evaluate performance. This allows traders to refine their strategies and identify potential flaws before implementing them in real-time trading.
- Automation and multitasking: Algorithms can continuously monitor the market and execute trades, freeing traders’ time to analyze other activities and additional opportunities.
- Reduction of manual errors: Algo trading minimizes the risk of manual errors such as entering the wrong trade size or executing a trade at the wrong price.
These are the advantages of algorithmic trading.
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Therefore, it can be said that algorithmic trading should be preferred as it is superior to manual trading.
Achievable skill set for algorithmic trading
Did you know that the skills required for algorithmic trading are not as difficult as you might think if you have the dedication, guts and perseverance to master them?
So one of the main reasons to become an algo trader is that the skills required to do algorithmic trading are achievable.
These skills are:
- Coding a strategy requires programming
- Strong analytical skills help traders analyze historical data and create strategies based on thorough analysis.
- Risk management is an integral part of trading as it helps you avoid losses.
- Algorithmic traders are highly valued for their technical proficiency, as they need to work with computers, AI, and more.
- Mathematical concepts such as probability and statistics are necessary for pricing derivatives, evaluating risk, or predicting market movements.
Additionally, you can easily acquire the above skills if you have the following traits:
- Emotional discipline means controlling reactions based on fear, greed, excitement, etc.
- A systematic approach means that the problem must be approached with an organizational mindset.
- A continuous learning mindset is essential. This is because only you can challenge yourself and acquire each skill.
- Attention to detail is required to ensure that you don’t miss any important aspects while learning.
- Patience and resilience will help you stay calm while understanding complex concepts.
- An individual’s critical thinking and problem-solving skills help them understand important concepts such as mathematics and analysis.
Rapid growth of algorithmic trading
Algorithmic trading has seen significant growth in recent years ⁽¹⁾. The increasing adoption of technology and the availability of market data have contributed to the expansion of algorithmic trading strategies.
Factors that have influenced its growth include:
market efficiency
Algorithmic trading is preferred by institutional investors and hedge funds because it can improve execution speed, reduce transaction costs, and potentially take advantage of market inefficiencies.
advances in technology
The development of faster and more powerful computers and improved connectivity and data storage have fueled the growth of algorithmic trading.
Regulation change
Regulatory changes, such as the implementation of the Markets in Financial Instruments Directive (MiFID) in Europe and the adoption of electronic trading platforms, are driving the use of algorithmic trading.
Increased data availability
The availability of vast amounts of real-time market data and the development of sophisticated analytical tools have enabled traders to develop and deploy more complex algorithms.
High Frequency Trading (HFT)
High-frequency trading, a subset of algorithmic trading that executes high-volume trades in fractions of a second, is growing in popularity. HFT firms use algorithms to take advantage of short-term market movements and capture small price discrepancies.
Therefore, learning algorithmic trading seems to be a good decision to see the growth achieved so far.
Algo trading has a bright future
The benefits of algorithmic trading are immense and more and more traders are turning to algorithmic trading. There is no doubt that algorithmic trading has a bright future.
So this is another reason why you should do algorithmic trading. Algorithmic trading is expected to grow ⁽²⁾ in the next few years. The future of algorithmic trading is expected to be shaped by continued technological advancements, regulatory developments and market trends.
The global algorithmic trading market is valued at USD 18.06 billion in 2023. Moreover, it is expected to reach USD 28.59 billion in 2027, exhibiting a CAGR of 12.2%. The future of algorithmic trading therefore looks bright.
You can see the projected growth of algorithmic trading below.
However, the future is subject to various uncertainties and market trends.
One thing is certain: new technologies, regulations and market conditions can have a significant impact on the development of algorithmic trading. Additionally, algorithmic trading is likely to see greater integration of artificial intelligence (AI) and machine learning (ML) techniques.
The use of alternative data sources such as social media sentiment, satellite imagery and web scraping is also expected to increase in algorithmic trading. By incorporating non-traditional datasets, traders can gain unique insights and develop innovative strategies.
In the future, regulators may focus on issues such as algorithmic transparency, risk management and potential market manipulation risks associated with high-frequency trading.
As algorithmic trading becomes more prevalent, a robust risk management system becomes critical. It becomes critical to monitor and control potential risks associated with algorithm errors, system failures and cybersecurity threats.
With the growth to date, we expect algorithmic trading strategies to continue to evolve as market conditions change. Traders explore new approaches such as sentiment analysis, deep learning, and reinforcement learning to gain a competitive edge. This means that the adoption of algorithmic trading practices will help in the future.
next step
Now that you’ve seen all the reasons why algorithmic trading should be preferred over manual trading, you can take a look at this section and take the next step.
In this section, we will tell you that learning algorithmic trading is not difficult if you have dedication, perseverance and a willingness to learn.
Here are the steps to learn algorithmic trading:
- Knowledge of core areas such as quantitative analysis, financial markets, and programming.
- Start with books and courses
- Learn through free sources such as blogs, podcasts, webinars, workshops and videos.
As mentioned above, learning algorithmic trading is not as difficult as you might think. The key points for successful algorithmic trading are:
- the right skills
- correct trading strategy
- A course that helps you build your practice from scratch, not just from the points you want.
But the key here is to understand that dedication and perseverance to learn the relevant skills are just as important in order to become an algorithmic trader. Without the above characteristics and commitment, algorithmic trading may seem difficult.
References
- https://roboticsandautomationnews.com/2022/10/08/why-algorithmic-trading-is-the-future-of-investing/55033/ ⁽³⁾
- https://www.openpr.com/news/3045682/automated-algo-trading-market-opportunity-analysis⁽⁴⁾
- https://en.wikipedia.org/wiki/Algorithmic_trading⁽⁵⁾
- https://shop.elsevier.com/books/algorithmic-trading-methods/kissell/978-0-12-815630-8⁽⁶⁾
- https://www.quantinsti.com/algo-trading-ebook
Conclusion
This blog aims to increase knowledge and understanding of why it is good to invest in algorithmic trading. There are many reasons why algorithmic trading is a highly profitable practice for traders. Before you take any steps, you should go through all the details necessary to understand the core of algorithmic trading.
If you want to learn more about algorithmic trading, take a look at our course. Algorithmic trading course. This course provides comprehensive coverage of all topics related to algorithmic trading over a 6-month period to help you grow in the field of algorithmic and quantitative trading.
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