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What are Algorithmic Trading and its Benefits?

Author: Pankaj Sharma
by Pankaj Sharma
Posted: Aug 15, 2019

A set of defined and clear instructions that are aimed to carry the task of the process is known as an algorithm. Due to the enormous numbers in the trading, a human alone cannot handle all this and there comes the need and intervention of an intelligent algorithm.

The popularity of Algo Trading Software is growing rapidly because many clients demanding it nowadays. This software is best in terms of quoting the mathematical algorithms analyze as the trade in the stock market, identify the liquidity and the opportunity of turning the information into the intelligent trading decision. Algorithmic trading or the computer direct trading cuts down the transaction costs and allows investment manager that would take control of their trading processes.

In the process of algo trading, the programmed computer is used to follow the defined set of instructions that are placed to trade to generate the profits at a speed and frequency that is impossible for the human trader. For the strategies of the algorithmic, the trading is required to identify the opportunity which is profitable in the terms of improved earning or the reduction cost. A defined set of rules are followed and is based on timing, price, quality or many mathematical models in the algo trading process. The market of the algo trading is liquid which makes the trading process well organized by eliminating the human emotions as that may affect the trading activities.

Some of the benefits of the Algorithmic-trading:

  • The prices of the trade are executed at its best rates.
  • The placement of the trade order in instant and accurate.
  • The trades are been invested instantly and correctly as it avoids significant price changes.
  • The transaction cost is reduced due to lack of the human intervention.
  • Risk of manual error is reduced in the placing of the trades.
  • The possibility of the mistake is reduced as the human traders are based on emotional and psychological factors.
  • The present-day greatest algorithmic-trading portion is of the high-frequency trading (HFT). These trading methods focus on placing a large number of orders at a very fast speed, across the multiple markets and the multiple decision parameters are pre-programmed based instructions.

Forms of trading and investment activities where Algorithmic-trading is applied:

Mid to long term investors: The firms like pension funds, insurance companies, mutual funds, etc. where the stocks are purchased in the large quantities but do not influence the stock prices with the discrete or the large volume investment.

Short term traders and sell-side participants: the speculators or the market maker who is benefited from the automated trade execution in the addition to the algorithmic trading aids in creating the sufficient liquidity for the sellers in the market.

Systematic traders (trend followers, pairs traders, hedge funds, etc.) they find it efficient to program the trades rules and let the program trades automatically.

Conclusion

The smart investors though need to understand the risk and challenges. In the Auto Trading Software, all the algorithms are generated as this will help to analyze all sorts of changes in the market and could read the fluctuation that is caused in the prices. More systematic approach is active trading on automated trading then the method based on the human trading.

About the Author

Manav Sharma a professional content writer having many years of experience in the field, here he has mentioned about the Algo Trading Software and its benefits.

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Author: Pankaj Sharma

Pankaj Sharma

Member since: Aug 11, 2019
Published articles: 1

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