In the past years, the algorithmic trading has definitely increased. Such would help to improve the market quality and is it best to encourage this? Well, there are so many of those who say that algo trading does help in improving the liquidity and would also boost the informativeness of the prices and quotes.
One reason why that algorithmic trading has surely become very popular is due to the benefits that it holds on trading manually. The advantages of algo trading are actually related to speed, accuracy and also minimized costs. Because the algorithms were actually written beforehand and they are executed in a manual way, then the main benefit is speed. Speed in which the different trades are done is being measured in just fractions of a second which is much faster than what the humans can perceive.
Algorithm trading has the benefit of scanning as well as executing on the different indicators at a speed that no human is able to do. Because the trades may be analyzed as well as executed in a much faster way, then there are a lot more opportunities which are available at better costs.
What you can also get from algo trading is accuracy. When the computer is automatically doing a certain trade, then you would be able to avoid such pitfalls of accidentally placing in the wrong trade associated with those human trades. Through manual entries, it is a lot more likely to purchase the wrong currency pair or such wrong amount as compared to the computer algorithm which has been double checked to ensure that there is correct order entered.
What is a big benefit to this kind of trading system is that this has the ability to get rid of human emotion from such markets and the trades are actually constrained in that set of predefined criteria. A reason why this is one advantage is due to the reason that the human trading is prone to emotions that can result to irrational decisions. Also, the two emotions which may cause poor decision but the algo traders are not exposed to are greed and fear.
What is also great about algo trading is such ability to backtest. It can be difficult for the traders to understand the parts of the trading system which actually work and what doesn’t because they are running the system on past data. Through the algo trading, you may run the algorithms according to the past data in order to see if it would have worked previously. Such type of ability would surely give you that big advantage since this permits the user to avoid the flaws of such trading system before running this live.
One excellent benefit that you can have from automated trading is the reduced transaction cost.