Trading in the financial markets has advanced to such a point where it has become nearly impossible for an individual to process the vast amount of data available. As such, sophisticated trading strategies have been implemented all throughout the trading universe, one of the latest being, Algorithmic trading, or Algo-trading. Algo-trading has gone a long way in improving overall trading performance and efficiency.
Algo-trading is essentially the use of computers to execute large trades at high speed with accuracy, employing advanced mathematical models and based on specific pre-programmed rules. The algorithms collect, analyze, and interpret large amounts of data such as market trends, news, and various other data-mining techniques to carry out trades and thus, on the whole, generate trading strategies. Such trading strategies allow traders to take advantage of changing market conditions quickly and more effectively, enabling them to gain profits more readily and efficiently compared to a manual trading strategy.
One of the main advantages of Algo-trading, that makes it suitable for novice traders is the control it provides. When you employ Algo-trading, you do not have to continuously observe the daily market trends or news to form an opinion and make a decision to buy or sell. Thanks to the pre-programmed rules, the automated system will analyze the data required and take decisions accordingly.
Moreover, due to its ability to process data in large volumes and speed, the transaction costs are also drastically reduced as compared to traditional trading. Since the computer can carry out operations in a fraction of a second, it greatly reduces the chances of delayed or missed opportunities. This becomes particularly important during occasions when prices suddenly change and the market is heated.
Finally, Algo-trading requires comparatively little effort on the part of the trader, hence perfect for those who are unaware of or lack the time or resources to effectively analyze market trends and news.
A few common Algorithmic trading strategies that traders use include Day trading, High frequency trading, Scalping, Momentum trading, etc. Day trading is an ideal option for novice traders wherein they can buy and sell assets such as equities, forex, futures, and commodities within the same trading day, not carrying any securities overnight. This system requires strict capital management and involves the use of analytical techniques for effective decision-making for a particular security.
High Frequency trading employs multiple strategies, such as providing liquidity and pricing, for trading instruments over short time horizons. However, it is also one of the riskier trading strategies which needs a trader to have proper knowledge of the market.
Scalping once again involves short-term trading but of a smaller trading duration. It follows a strategy of identifying money-making opportunities within the same day and goes in for lower profit margins but more frequent trades. It is considered a difficult technique and is not suitable for novice traders.
Finally, Momentum trading is a strategy that follows a trend and attempts to benefit from price continuance. It involves buying stocks before they expect a upward spike in prices, as well as selling stocks before they expect it to fall.
It is clear that Algo-trading has been a boon to both experienced and novice traders, offering prospects of profits, and higher efficiency and accuracy than manually trading. It requires little effort on the part of the trader, and the automation minimizes the chances of mistakes. Furthermore, the trading strategies when chosen properly, can help traders benefit greatly. With all this said, it would be wise to thoroughly evaluate each trading strategy and its associated risks, in order to make the most of Algo-trading.