Pushing people into trading in financial markets, known analysts, savvy traders, and experts have flooded the Internet with Forex-related materials. All of them underscore the simplicity of trading that anyone can afford. They assure people that it is easy to gain profit by making a few clicks on a PC or gadget. The opportunity for easy earnings is frequently linked to the mysterious term of algorithmic trading. Let’s try to understand whether it is a real magic wand for those who cannot spare a lot of time to trade. Moreover, some experienced speculators consider algorithmic trading a perfect solution for making money. Now let’s figure out the nuts and bolts of this popular trading strategy as well as its opportunities and fields of application.
Algorithmic trading in nutshell
Algorithmic trading (also known as automated trading, black-box trading, or algo-trading) is a process of executing orders by means of trading robots (expert advisers*) or mathematical algorithms* that are capable of making highly accurate forecasts of an asset’s further dynamic. High-frequency trading technologies alongside pre-programmed instructions make algorithmic trading more advantageous than human trading.
Algorithmic trading rests on three main features:
· Intricate formulas
· Mathematical models
· Human supervision in making decisions to buy/sell assets on exchange floors
Nowadays algorithmic trading is present in a variety of situations, including order execution strategies, arbitrage*, and trend trading strategies*. Its principles are successfully exploited by retail investors, institutional banks, hedge funds, investment funds, and pension funds. The reason behind the enormous popularity of automated trading among institutional investors is that they can quickly book profits off price fluctuations with huge orders.
* An expert adviser is a code of trading instructions to analyze market variables such as price, timing, and trade volume and decide on the appropriate market entry. An expert adviser is aimed at placing buy/sell orders with pinpoint accuracy.
* An algorithm is a set of trading instructions to solve a particular task.
* A trend trading strategy is the one to gain a profit through the analysis of an asset’s momentum in a particular direction.
* Arbitrage is simultaneous buying and selling of the same or similar assets in different markets to profit from tiny differences in their prices.
Main features and breakdown of algo-trading
* Algorithmic trading is the process of using trading algorithms* based on particular rules and strategies of executing trades.
* Automated trading became a mainstream trading method in financial markets, including Forex, in the early 2000s. Back then, large brokerage companies introduced the service of automated trading to their clients. InstaForex was among them. Retail and institutional investors had to do the only thing: to select an algorithm of order execution. The rest of the trading steps were made by a robot.
* The concept of algorithmic trading is a synonym of the older term, automated trading. It comprises algorithmic trading strategies such as black-box trading, quantitative trading, scalping, etc. All of them are based on complex mathematical and statistical formulas and high-frequency technology.
* Nowadays more and more investors opt for algorithmic trading to speculate in stock markets. According to data from separate sources, from 30% to 70% of all trades on Wall Street are executed through trading robots. Automated trading accounts for 80% of all transactions on Forex.
* Despite the fact that algorithmic trading suggests obvious advantages (fast and easy order execution and low trading-related costs), trading robots can aggravate the market’s negative behavior by causing flash crashes and immediate loss of liquidity. Now let’s discuss the advantages and disadvantages of this trading method.
* Trading algorithm is a set of rules and instructions to obey during the whole trading session.
You may learn about the features of expert advisers and opportunities of automated trading in detail in the special section on InstaForex official website.
Advantages and disadvantages of automated trading
Pros
1. Despite the fact that automated trading is freely available to any market participant, it is mainly used by institutional investors and big brokerage firms as they are interested in cutting down on costs related to trading. According to recent research, algorithmic trading is especially beneficial for large order sizes that may comprise as much as 10% of the overall trading volume. Commonly, market makers use algorithmic trading to create liquidity.
2. Algorithmic trading also enables faster and easier execution of orders. This is a weighty advantage for market participants as they instantly book profits off small price fluctuations.
Cons
1. However, things are not so clear-cut about algorithmic trading. Frequently, the high speed of order execution, which is an advantage in ordinary market conditions, can become a problem for investors. A flash crash might occur when several orders are executed at a time without human intervention.
2. Another disadvantage of algorithmic trades is that liquidity, which is created through rapid buy and sell orders, can disappear in no time. So, a trader may not gain profits off price changes. Research reveals that algorithmic trading has been a major cause of liquidity loss in currency markets.
Conclusion
Nowadays, automated trading is in peak condition. We can dig into its pitfalls, but the advantages of this trading method certainly outweigh. At present, algorithmic trading meets all requirements of a modern investor: it saves time, eliminates emotions, and does not imply profound knowledge of markets. Are you ready to check this reasoning in practice? Register with InstaForex and explore limitless opportunities of automated trading with a reliable broker!