Algorithmic automated trading software works by participating in the financial markets, while specific rules and regulations govern it. As the human behind this algorithm, you will be provided with a thorough report on setting parameters such as entry and exit points of the trade you wish to put your money on.
Automated trading removes all the hurdles and helps you carry out multiple trading exchanges at the same time while also helping you save your time (and money!) It does take the emotional quotient out of your trading decisions, as all the rules of trading that suit you are built into the algorithm’s layout.
What is Automated Trading and Why Should You Know About it?
After you have chosen the platform on which you would like to work, you can go ahead with setting the parameters of your trading strategy. These steps can also be done by training the algorithm with all of your experience and techniques followed.
Your algorithm will then learn and start applying the same knowledge to making trades on your behalf. These factors can include trade timing, quantity, opening and closing time, etc.
The automated training software that has been made competent will continue to monitor the rises and lows in the market itself and execute trades on your behalf if a particular set of conditions are met.
In this way, the trades move faster and with much more efficiency, as the algorithm will take care of specific events that can happen quickly.
The Advantages of Using Automated Trading
- Flexible working time
- Planned vs. your gut feeling; reduction of human emotional response and the trading is made using hard facts
- Analyze the range of indicators
- Executing events in real-time
- Completely removes human interaction with the trades
- Trades will be executed at a price that will be profitable for you
- Trades are placed in an instant and are very accurate
- Trades take place at a reduced traction rate
- A total reduction in any human error that can happen in such cases
How Does Algorithmic Trading Take Place in the Real Environment?
If a trader gives two sets of clear instructions to the automated trading software, one on how to purchase stocks or shares of a company and the other one describes when and how to sell those shares; the algorithm will adapt to these instructions and execute trading decisions.
The other way of achieving the same prediction level is to train the algorithm with different training sets or trading opportunities from the past.
Strategies Followed When an Algorithm is Used
To be profitable, an algorithm should identify the best possible outcome of a particular trading scenario. Here are some common automated trading strategies:
Opportunities Arising Through Arbitrage
Arbitrage arises when the same stock is listed at a different price point somewhere. Algorithms help detect opportunities where there is a possibility of arbitrage and then use this as a profitable trading strategy.
You may also follow the trading strategy based on mathematical models. Mathematical models can be generated and used for trading, using previously accumulated data.
The Shortfall of Implementation in the Market
This strategy has the scope of minimizing the execution cost of one order by real-time trading. It helps in reducing the cost of the order and also prevents delayed execution.
The idea of using an algorithm to increase your profit is very tempting, but automated trading software is no match for the years of experience specific traders have. Technology can fail at any time, but your experience won’t.
That is why you should not take automated strategies as they are and train the algorithm well.