The algorithmic trading has greatly increased in the past years. This helps in improving such market quality and should this be encouraged? There are a lot of those who are saying that algo trading helps in improving such liquidity and also boosts the informativeness of the quotes and prices.
A big reason why the algorithmic trading has become really popular is the due to the benefits that such holds over trading in a manual method. The benefits of such algo trading are related to accuracy, speed and also reduced costs. Since the algorithms were written in advance and they were executed manually, then the primary advantage is speed. The speed wherein those trades are made is actually measured in just fractions of a second and this is much faster than what those humans actually perceive.
The algorithm actually has the benefit of scanning and executing on various indicators at a speed which no human has done. Because the trades may be analyzed as well as executed in a much faster way, then there are a lot more opportunities which are available at better costs.
What you can also get from algo trading is accuracy. When a computer can execute a trade automatically, then you will be able to prevent the pitfalls of putting the wrong trade accidentally which is common in human trades. Through manual entries, it is a lot more likely to purchase the wrong currency pair or such wrong amount as compared to the computer algorithm which has been double checked to ensure that there is correct order entered.
What is a big benefit to this kind of trading system is that this has the ability to get rid of human emotion from such markets and the trades are actually constrained in that set of predefined criteria. The reason why such is an advantage is because those humans trading are susceptible to such emotions which may lead to irrational decisions. Such two emotions which lead to poor decision which algo traders are not susceptible to are greed and fear.
What is also great about algo trading is such ability to backtest. It can be difficult for the traders to know the parts of the trading system work and what doesn’t work because they cannot run their system on previous data. Through the algo trading, you may run the algorithms according to the past data in order to see if it would have worked previously. This kind of ability would give you a huge advantage because this allows the user to eliminate any flaws of the trading system prior to running such live.
What is a great benefit that you may have from the automate trading is that minimized transaction cost.