Advantages of Algorithmic Trading
One of the big reasons that algorithmic trading has become so popular is because of the advantages that it holds over trading manually. The advantages of algo trading are related to speed, accuracy, and reduced costs.
Since algorithms are written beforehand and are executed automatically, the main advantage is speed. The speed at which these trades are made is measured in fractions of a second, faster than humans can perceive.
Trading with algorithms has the advantage of scanning and executing on multiple indicators at a speed that no human could do. Since trades can be analyzed and executed faster, more opportunities are available at better prices.
Another advantage to algorithmic trading is accuracy. If a computer is automatically executing a trade, you get to avoid the pitfalls of accidentally putting in the wrong trade associated with human trades. With manual entries, it's much more likely to buy the wrong currency pair, or for the wrong amount, compared to a computer algorithm that has been double checked to make sure the correct order is entered.
One of the biggest advantages of algo trading is the ability to remove human emotion from the markets, as trades are constrained within a set of predefined criteria. Why this is an advantage is because humans trading are susceptible to emotions that lead to irrational decisions. The two emotions that lead to poor decisions that algo traders aren't susceptible to are fear, and greed.
Another advantage to algo trading is the ability to backtest. It can be tough for traders to know what parts of their trading system work and what doesn't work since they can't run their system on past data. With algo trading, you can run the algorithms based on past data to see if it would have worked in the past. This ability provides a huge advantage as it lets the user remove any flaws of a trading system before you run it live.
Another advantage of automated trading is the reduced transaction costs. With algo trading, traders don't have to spend as much time monitoring the markets, as trades can be executed without continuous supervision. The dramatic time reduction for trading lowers transaction costs because of the saved opportunity cost of constantly monitoring the markets.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.