Manual trading was the most common technique used to buy and sell shares at one point in time. However, the technology advancements of the recent past have led to the formulation of software programs that facilitate various trading activities. Algorithmic trading is also termed as automated trading. It implies that all the trading activities are executed using trading software based on an algorithm. A programming language is used to code the algorithm based on a back-tested trading approach. The decisions are derived from a statistical model that monitors and evaluates the market patterns before trading.
Investors should consider using algorithmic trading software other than the conventional approach for the following reasons:
1) Back Testing
Algo Terminal provides a great trading experience because it utilizes a back-tested engine for optimization. A trading system is bound to be faulty if not well maintained. It is frustrating for traders to know what parts work or not in their trading system. The challenge is encountered because you cannot run the system using past data. Algorithmic trading uses the back-testing approach. It allows investors to run and gauge algorithms based on past data. This method makes it easy to determine if the code has worked in the past. The system provides room to remove any problems before using it live.
2) Automated Trading
Automatic execution of trading system is facilitated by writing algorithms in advance. This feature enables the system to configure the data into intelligent trading decisions based on the market patterns. You do not have to spend so much time monitoring and analyzing the market patterns to decide on. The models can execute these roles without constant supervision leading to liquid opportunities identification.
Time reduction in trading helps to reduce the transaction costs incurred by traders. There is a saved opportunity cost from the lack of need to monitor the markets continuously. It gives the investors time and money to focus on and explore other profitable opportunities.
Automated trading is also fact compared to the manual method. The model allows and executes multiple indicators within a fraction of seconds simultaneously. The fast trading pace enables you to get better opportunities at greater prices compared to the conventional model.
The accuracy of the automated model also makes it a reliable option. The algorithms are reviewed to ensure accurate placement of orders. This system reduces the chances of human errors leading to poor decision making. You can also back-test the algorithms to ascertain accuracy by running it on past data.
As humans, we often attach emotions to most of our decisions. Manual trading involves lots of speculation, which is often based on the market patterns and our gut feeling. The algorithm trading platform erases the use of emotions when making trading decisions. A planned criterion is used to constrain the trades on the platform. Our emotions sometimes lead to irrational decisions, which are not always profitable. Gambling is a good example of how people lose money sometimes because they are certain that their gut feeling will not let them down. This automatic trade discards emotions such as fear and greed leading to rational and profitable trading decisions.