Algorithmic trading: advantages and disadvantages.
Algorithmic trading originates in the 2000s. Oddly enough, but initially trading robots were created not to maximize profits, but to automate the execution of large orders. At first, such algorithms were used by investment and mutual funds, banks, institutional investors, who simply could not afford the extra risks when working with huge sums of money. Previously, you had to apply to special companies, which employed very experienced and qualified employees who specialized specifically in opening orders. But working through intermediaries was very inconvenient, and when programmers developed automatic engines for opening deals, complex orders began to be executed much more conveniently. And although the commission for using such an engine was higher than the cost of intermediary services, it was still profitable.
Today there are two types of algorithmic trading: mechanical and automatic. Mechanical algorithmic trading is a way of trading when a robot gives trading signals based on market analysis, and the trader himself decides whether to follow them or not. Automated trading involves the complete elimination of the trader from the trading process: the trading robot does everything by itself - it opens and closes positions based on the algorithm embedded in it.
Advantages
Increased speed:
One of the main advantage of algorithmic trading is the increased speed it provides. Algorithms are able to analyze a wide range of characteristics and technical indicators in a fraction of a second and execute a transaction instantly. Additionally, the robot is able to open or close several transactions for you at once, which will increase your potential profit. The increased speed becomes very important as traders can pick up price swings as soon as they occur.
Improved accuracy:Another important advantage of algorithmic trading is that it requires less human intervention. This greatly reduces the chance of errors. Programs are not able to put a comma in the wrong place or an extra zero, which is a common human error. A trader can make a mistake and mistakenly evaluate technical indicators; but in ideal situations, computer algorithms do not make such mistakes, the robot does not enter into the wrong trade. Algorithms are checked and rechecked, and the human factor does not affect them. As a result, transactions are executed accurately.
Round the clock work:Obviously, a trader cannot trade all the time. No matter how hardy a person is, he needs at least 8 hours for healthy sleep and rest. And if you add here work, household chores, communication with family, etc., it turns out that there is very little time left for trading. But in the market there are always favorable situations for making profitable trades, and most traders simply miss them. But the trading robot works 24 hours a day. It has no other business and does not need to take a break, so even if a good opportunity to open a good deal appears at 3 o'clock in the morning, the robot will certainly take advantage of it.
No emotions:Any trader is more or less dependent on emotions, which sometimes interfere with trading. Fear, uncertainty, or vice versa, self-confidence, excitement, greed - this is what prevents you from achieving success in trading. Algorithmic trading eliminates the human factor, because the automatic system operates solely according to the rules of the strategy on which it is based. In general, if there is the most disciplined trader in the world, then this is a trading robot.
Opportunities:It is difficult for an ordinary trader to work with a variety of indicators and exchange assets, he has to choose 1-2 market assets and some of the most convenient technical analysis tools. Algorithmic trading greatly expands the possibilities of earning, since the robot can work with indicators and exchange assets in any quantity. The only caveat is that you need to set the correct settings for the trading robot and adjust them from time to time.
No experience required:Even those who do not yet have sufficient knowledge in the field of trading can start earning with the help of trading robots. After all, automatic systems do everything instead of a trader who is not obliged to delve into all the trading nuances.
Reduced cost:Algorithmic trading allows you to make a large number of transactions in a short period of time. As a result, many transactions are made, and transaction costs are reduced.
Process automation:In general, order execution, entry and exit become more systematized with the help of algorithmic trading. It turns into a step-by-step procedure for following instructions. Thanks to this, trading becomes much more objective and simplified.
But, of course, not everything is so smooth and simple, and algorithmic trading also has its pitfalls.
Disadvantages
Flexibility:
The robot works great in those periods when the market situation does not change, but as soon as something unexpected happens, the algorithm fails. When fundamental rather than technical factors come to the fore, the robot continues to work according to the same scheme, which is no longer effective in the new market conditions. The profitability of a trading robot decreases when unexpectedly good or bad economic data are published, when political changes occur in the country, when natural disasters occur that also affect the exchange rate, and so on. In these cases, a sharp human mind is much more preferable.
Reliability:Finding a truly reliable trading robot is not so easy. According to statistics, of the entire mass of offers on the Internet, only 5-10% are worthy, the rest are either non-working robots or simply fraudulent schemes. Therefore, if you want to use a trading robot, then choose only those offered by reliable developers.
Dependence on technology:The big disadvantage of algorithmic trading is its dependence on technology. In many cases, trade orders are stored on the computer and not on the server. This means that if the Internet connection fails, the order will not be executed. This undermines the whole concept of algorithmic trading. In such cases, traders lose their chances and risk losing money. There are serious systemic problems with algorithmic trading that can lead to massive sudden collapses of the entire market.
Resource requirements:While algorithmic trading helps reduce transaction costs, it also increases costs. Traders must be equipped with high-end resources, have access to a server and build algorithms using expensive technologies. Another significant expense is the cost of data feeds that help develop intraday strategies.
Understanding the programming process:Algorithmic trading requires the development of algorithms by traders. Writing the programs themselves is a laborious and lengthy procedure that requires a thorough study of the behavior of real traders, market psychology, quotes and other factors that directly affect performance. Not all investors are technically savvy. As a result, they may need to either learn new processes or hire someone. Due to the technical knowledge requirements, algorithmic trading is extremely difficult for the public.
Permanent monitoring:The ideal picture of algorithmic trading is that the algorithms are pre-programmed and the trader can be away from his computer for a long time. However, this is not true. The trader should continue to check the system for any mechanical problems such as connections, power outages, etc.
So is it worth it or not to use trading algorithms?
Obviously, with all the advantages of robots, they cannot be completely relied upon. The best option is to combine manual and algorithmic trading and use robots as a hint and risk diversification tool in order to be successful in any situation.