What is Algorithmic trading? What are the advantages & disadvantages of algorithmic trading?
Advanced mathematical models are used in Algorithmic trading which is a trendy form of trading. The rules are fixed in the algorithm to judge the best time to take a trade in the stock market. The algo trading technique is used by big institutions that purchase and sell large blocks of shares on a daily basis.
Advantages of algorithmic trading
Algorithmic trading is a widely accepted strategy as the choice to buy or sell a share is merely on the foundation of the composite programs and there is no human interference when making the trades which keeps aside emotions.
Computers are proficient of working faster than humans. It is capable to execute and track for a range of parameters on different stocks at a given time.
This makes it very competent and resourceful as no trades get missed.The robot takes care of executing the orders on online share trading when the traders rest.
Disadvantages of algorithmic trading
The algorithm is merely reliant on what you provide into the system. It does not have its own intellect. Consequently with no ability to logically adapt to changes in the market, algo trading loses out to human trading.
The trading strategy is based on back tested research and hence any development in the market state of affairs will not furnish into its programs until the algorithm is changed to regulate those changes.
Generating an algorithm is not an easy task and needs hours of work. In order to code the computer programming language, a person has to be hired with adequate knowledge in the field.
Periodic alterations have to be done from time to time for changes. This becomes a time consuming and expensive one.
Back tested data is taken into account for feeding the system. Remember these are not facts but only based on assumptions that these historical patterns will repeat in the future. Trading through computers becomes an option for the trader based on his comfort zone.