Algorithmic trading is one of the popular ways of carrying out trades in the stock market. The algorithmic trading executes orders using
high speed computer. Algorithmic trading is also known as automated algorithmic trading because there is
no human interference. In this type of trading, the trades are carried out at a rapid pace and it is
impossible for a normal human being to carry out such trades.
In automated algorithmic trading, there is a
defined set of instructions in a computer program. The trades are carried out automatically on the basis of price, timing, quantity or any mathematical program that is pre-feed. Algo trading is much more
systematic than normal trading because it rules out the involvement of
human emotions.
Let us take an example to understand the concept of automated algorithmic trading.
Example of Algorithmic Trading
To use algo trading mechanism, a trader can give the program of buying 100 shares of a stock when it hits 52 weeks high or goes above the 200 days moving average. Similarly, a sell program of 100 shares can be set when the stock goes below its 52 weeks low or below the 200 days moving average.
By giving
simple instructions, the computer would carry out automatic trades when any of the pre-defined conditions are met. Here the trader is
not required to monitor the price of the stock or view the graphs because the
computer would automatically carry out the transaction by identifying the opportunity.
Let us now learn about the benefits of automated algorithmic trading.
Benefits of Automated Algorithmic Trading
The following are the benefits of algo trading:
- To know if the algo trading strategy is successful or not, the strategy can be back tested using historical and real time data.
- There is no risk of manual errors.
- There is no involvement of human and mistakes because of emotional or psychological factors do not exist.
- The trades take place at the best possible price.
- The orders are placed instantly and accurately.
- The timing of the trades is correct and this avoids any significant change in the price.
- Many scripts can be traded at the same time with high frequency.
- Algo trading enables you to manage multiple open positions.
- There is complete clarify of the maximum loss that can be incurred and the gains that can be made in algo trading.
- Algo trading is a scalable model.
- In algo trading, gap positions can be instantly squared off.