Implementing new technologies has made the way of investing in the different markets advance by leaps and bounds. For future brokers and money managers, it must be essential to know the new investment mechanisms to explain them clearly to their clients. Today, we want to focus on a method that has been gaining fame in recent years: algorithmic trading.
What is algorithmic trading?
Algorithmic trading is a form of automated investment that is performed by machines or robots with a system of previously established parameters. Therefore, we can say that this practice is the automation of trading.
Algorithmic trading allows the creation of a system with specific rules and parameters to open or close positions without human intervention. These systems are based on programmatic codes and complex mathematical and financial models that can be applied in different occasions and circumstances.
Those who use algorithmic trading can, through the intermediary system, make numerous offers in different markets as long as the conditions are right.
Algorithmic trading software can analyze a large amount of data to determine the best time to invest; this allows investments to be processed at precise and controlled times to help achieve the highest possible returns.
However, these systems are not self-aware and do not make decisions autonomously as an experienced trader would. On the contrary, they follow established patterns that tell them when to act. Although, they are capable, through analysis, of identifying good investment opportunities.
For example, the investor can schedule a buy order for a specific asset when it drops a few points or reaches determined profitability parameters.
When the system detects the appropriate conditions, it executes the programmed order in advance without requiring the investor to approve the transaction.
Algorithmic Trading vs Discretionary Trading
Now that you know what algorithmic trading is, it is possible to compare it with discretionary trading, the more traditional form of trading.
This practice describes the manual and autonomous method of opening or closing positions at the trader’s discretion based on his experience. In this type of trading, the investor analyzes the markets, risk indices, potential profitability, and fluctuations to determine the best time to make a transaction.
Discretionary trading requires a lot of time, analysis, and experience in the financial field for strategies to be effective. Therefore, new investors and brokers may find discretionary trading complicated and risky.
For this reason, algorithmic trading is a safer and easier alternative for all those novices who want to start with their investments and do not have the previous experience to take their strategies.
However, this does not mean that algorithmic trading guarantees profitability; what it does is alleviate certain factors that can hinder an effective strategy, such as emotions or human error.
Needless to say, while algorithmic trading is automated and does not require manual action by the trader, it does require keeping a detailed record of transactions; this will make it possible to develop more profitable strategies based on previous experiences considering various factors. So automated trading users should keep a “trading journal” and constantly monitor the programs that open or close positions for them.
Now that you know what algorithmic trading is and we can compare them, we see then that both types of trading are valid but have clear limitations.
A highly experienced investor can find valuable investment opportunities, and that can lead them to generate more money than with algorithmic trading.
On the other hand, automated trading is more reliable and secure for inexperienced investors and requires less manual work.
Advantages of Algorithmic Trading
- The investor can make trades automatically through software 24 hours a day.
- You do not need to constantly research the markets and their fluctuations to decide the best time to invest.
- Automated trading is a reliable practice that accounts for over 80% of daily transactions.
- Investment risks associated with impulse buying, emotions, or human error are eliminated.
- Extensive experience in stock markets or other assets is not required.
Disadvantages of Algorithmic Trading
- Algorithmic trading requires extensive knowledge of programmatic and financial mathematics. In turn, it requires mastering platforms such as Python or Metatrader4.
- There are limitations to what can be programmed. It may be easier for an experienced investor to find investment opportunities than for a machine that can influence how much money you can make with each trade.
- This type of trading is susceptible to system, platform, or internet failures that can stop it from working and result in lost investment opportunities.
- It often requires a higher investment in creating and optimizing the systems.
What do you need to start using algorithmic trading?
Now that you have understood this ingenious trading method and what it implies for each type of trader, you may want to learn how to implement it.
As mentioned above, this method requires specific knowledge of systems that will be applied when configuring the software parameters.
At Smart Broker Solutions, we provide you with the right software and platforms for the algorithmic trading you are looking to offer. We advise you at all times and take care of all the paperwork for you to become a broker in record time.
If you have questions, contact us, and we will be happy to provide you with the information you need.