A Stock Broker Making Trades Vs. An Algorithm. Let's Find Out What's Better!
The pioneers of the stock market would have never thought that intricate computing algorithms would make their way to the system within a few decades. Technology has infused so well with the market, that anyone, from any part of the world, can buy and sell stocks.
With artificial intelligence (AI) and data analytics progressing at impressive speeds, a new way of stock trading, known as algorithmic trading( also called automated trading or algo-trading), has transformed the way how investors leverage optimal market conditions.
This form of trading extensively uses computers programmed to follow a specific set of instructions and constraints. These constraints can include parameters such as timing, amount, pricing, and so on.
By considering the user inputted parameters, algo-trading ensures that the trades are executed at the exact time, with perfectly accurate order amounts. That's just the tip of the iceberg. With algo-trading, you can simultaneously monitor multiple market indicators and so much more.
In short, algo-trading eliminates the risks associated with the inaccuracy of manual trading. Let's take a look at why and how algo-trading reaps better returns than a stock broker relying on manual trading.
1. It is Faster and Precise
Even though human brains are extremely powerful, artificial intelligence rules in terms of instant computation power. With the help of algo-trading, investors can effortlessly spot several market indicators that may seem nearly impossible for an individual to analyze.
With algo-trading, trade order placements are made instantaneously with impressive order entry speeds, further increasing the chances of execution at desired prices. Since the market fluctuates in incomprehensible speeds, manual traders will have a hard time buying or selling at precise moments.
2. It Saves Time
Automation ensures that you don't have to monitor the market continually. Once you set a specific buying or selling rate, algo-trading software will take care of the rest. Investors can utilize this saved time to indulge in other activities.
3. It Makes Arbitrage trading Seamless
Another beneficial aspect of algo-trading is the technique of arbitrage, which involves profiting from the differences in markets. For example, if a store sells a chocolate bar for a dollar and another place buys them for two dollars, you can buy as many bars from the first place and sell it to the second place for profit.
This is the basics of arbitrage trading algorithms, and they are highly lucrative. Since different exchanges are essentially a different market, their prices might not always be aligned. So, if you are to identify these differences, you can gain huge from it.
But arbitrages change so quickly that humans will have a hard time tracking it. But algo-trading can surely exploit this opportunity.
4. It Utilizes Trend-Following Strategies
With trend-following strategies, algo-trading buys and sells shares based on changing averages, price movements, and other market indicators. Even though these strategies are purely based on the market data collected, they might be a bit overwhelming for humans to analyze.
5. It Minimizes Emotional Trading
With the help of algo-trading, the emotions of investors are minimized throughout the process. For example, while manual trading, investment brokers may be reluctant to place orders by blindly following their "gut feelings." Although this may work at times, it usually leads to losses.
With automated trading, once the order parameters are set, there won't be any delays caused by the reluctance of traders to press the button. The system will also make sure that individuals don't overtrade thoughtlessly.
Automated trading also ensures that the traders follow the trade rules and trading plan established. As losses are an unavoidable part of trading, computerized systems reduce the psychological trauma losses can cause to an individual with the help of a trading plan.
6. It Allows Backtesting
Backtesting is a method of applying trading rules to historical market data to estimate whether a strategy will work or not. If backtesting works, traders can gain more confidence that a specific idea will work.
In algo-trading, backtesting is extensively used as guesswork is not a computer's cup of tea. This makes sure that each trading plan will be implemented only if it is seen viable by the system - which in turn significantly reduces the risks associated with trading.
If the system finds a particular trading plan to be impracticable, it will prompt the investor to alter the strategy. If the plan has lower rates of success, the system will entirely reject it.
With the help of backtesting, investors can carefully monitor the feasibility of a trading plan and further tweak it. This will also help in determining the system's expectancy, which is essentially the average amount an investment broker can expect to gain or lose per unit of risk involved.
7. It Allows Diversification of Trading
With the help of algo-trading, investors can trade in multiple accounts, with different strategies at the same time. Such practices significantly reduce the risk associated with trading, as investors can effortlessly create a hedge to minimize losses.
8. It Supports High-Frequency Trading
High-Frequency Trading, popularly known by its acronym HFT, is a trading method in which large numbers of orders are placed at high speeds across multiple markets and parameters, based on several pre-programmed instructions.
Such methods of trading ensure higher profits than how much much manual trading can generate. As these processes take place in blazing speeds, beyond a human's decision-making capabilities, only a computer can pull-off such a feat.
9. It Utilizes Implementation Shortfall Strategy
The implementation shortfall strategy focuses on reducing the execution cost associated with each order by trading off the real-time market. Such a strategy will increase the targeted participation rate associated with a trade when the stock price changes favorably and decreases when the price changes negatively.
So there you have it - nine reasons why algo-trading is far superior to manual trading. In essence, algo-trading not only saves time and efforts but more importantly, it is a secure way of trading that eliminates all forms of human errors.
From mid to long-term investments, algo-trading can be applied to numerous trading and investment activities. These algorithms are precise that they can trade in even micro-seconds and help investors benefit from highly-desirable outcomes.