Algorithm trading (automated trading, black-box trading, or simply algo trading) is the process of using computers programmed to follow a defined set of instructions for placing a trade in order to generate profits at a speed and frequency that is impossible for a human trader. Nowadays there are plenty of trading companies and traders using an algo trade.
It is easy to find a trading company that can match traders goals.
Thanks to algorithm trading, a growing number of investors are taking part in markets.
Also known as algo trading, algorithmic trading is a method of stock trading that uses intricate mathematical models and formulas to initiate high-speed, automated financial transactions.
Advantages of algo trade
The goal of algorithmic trading is to help investors execute on specific financial strategies as quickly as possible to bring in higher profits. The Algorithm trading is a computer program designed by expert developers to follow a given market algorithm, every minute of the day.
The automatic system in algo trade is programmed to look for trends, analyze market data and apply specific mathematical/technical formulas which in turn generates signals: buy and sell orders – to go long or short.
The performance in algo trade – whether hypothetical or live- is tracked in real-time and you can subscribe, activate and deactivate any system at any time.
An algorithm is a set of defined rules designed to carry out a certain process. Algorithmic trading uses computer programs to trade at high speeds and volume based on a number of preset criteria, such as stock prices and specific market conditions.
The major advantage of algorithm trading is that it automates the trading process, ensuring that orders are executed at what are deemed to be optimal buying or selling conditions. Because orders are placed instantly, investors can be assured that they won’t miss out on key opportunities.
Manual orders, by contrast, can’t come close to mimicking the speed of algorithmic trading. Moreover, because everything is done automatically by computer, human error is virtually excluded.
Furthermore, algorithmic trading often limits or reduces transaction costs, thus allowing investors to retain even more of their profits. Finally, algo trading eliminates the dangers of acting on emotion instead of logic, which investors are known to do.
Why Automatic trading system?
Institutional clients need to trade large amounts of stocks. These amounts are often larger than what the market can absorb without impacting the price.
• The demand for a large amount of liquidity will typically affect the cost of the trade in a negative fashion (“slippage’’)
• Large orders need to be split into smaller orders which will be executed electronically over the course of minutes, hours, day.
• The procedure for executing this order will affect the average cost per share, according to which the algorithm is used.
• In order to evaluate an algorithm, we should compare the average price obtained by trading with a market benchmark.
The first and perhaps the most important aspect of algo trading is data. Data is an algorithmic trader’s best friend. A trader needs to have access to data for the respective segments of the exchange that he intends to trade in.
The benefits of Algo trade
Speed: Algorithms are written earlier. It gives you the opportunity to execute the instructions automatically. The main benefit is speed. The trades can be analyzed and executed faster.
Accuracy: This is the key to better results, higher the accuracy better the results. The trading company that uses automatic trading software perform better because they are more accurate in executing orders. The orders are put using computer software. Compared to a trading company who manually put the orders, automatic trading company has better accuracy.
Cost reduction: Algo trading results in cost reduction. A lot of time is saved as there is no need to constantly watch the market. The trading can be done without constant supervision.
Trade management can make the difference between a successful trade and trade that ends up losing money.
Trying to define trading risk, we are calculating the probability of a stock going up versus that of it going down. Every trader has to weigh how much trading risk is willing to take in circumstances of the uncertainty. The essential is to take some trading risk in order to achieve profits.
There is no gain without pain.
Risk management is the process used to mitigate or protect your personal trading account from the danger of losing all your account balance. The risk is defined as the likeliness a loss will occur. If you manage the risk you have an excellent opportunity of making money in the market.
Basically, risk management it’s just a method to control the risk exposure when trading.
It is difficult to draw a line between reasonable risk and imprudent risk. The trader should have practice, at first through paper trading. Also, the trader should work on fundamental analysis and technical analysis. And, the trader needs to have a game plan in place before even consider getting in the trade.
That game plan is called trade management. The trader has to manage the trade, whether it goes for him or against him.
The best way to pre-define the risk is to build a stop loss management strategy
Working on a risk management strategy should identify the percentage of the trade size of risk.
A trader who isn’t working on his trade management approach is usually leaving a lot of money on the table. The wrong trade management can make the difference between a losing and a potentially profitable trader. There are a lot of examples of trades where stop loss was moved too close and got taken out before the price went for the target. Or, took an early exit and missed out on a big move.
It’s critical for every trader to determine how will manage the trade before entering the trade.
Committed traders keep track of progress and there is no better way to do this than a trading journal. That is the best way for trade management.
The clearly defined entries, targets, and stops for each trade. That is trade management.
In every trade, you undertake you should have clearly stated goals. This means you should always know how much you are ready to lose and what you are aiming for in terms of profit target.
You must have your trade management rules fully planned out ahead of time before the trade is initiated.
Risk management strategy helps cut down losses. It can also help protect a trader’s account from losing all of his or her money.
When does risk occur?
The risk occurs when the trader takes a loss. But, it can be managed. Risk management can provide a trader in making money in the market.
It is essential to successful active trading. There is potential danger every minute of each day for traders, all profit can be lost in just one or two bad trades without a proper risk management strategy. So, how to develop the best risk management strategy to control the risks of the market?
Successful traders commonly quote the phrase: “Plan the trade and trade the plan.”
Stop-loss and take-profit points represent two key to risk management strategy. Successful traders know what price they are willing to pay and at what price they are willing to sell. They know how to measure the returns against the probability of the stock hitting their goals. If the adjusted return is high enough, they execute the trade.
Contrary, unsuccessful traders often enter a trade without having any idea of the points at which they will sell at a profit or a loss.