Algorithmic trading: advantages and disadvantages.
High-frequency trading, HFT is the basic form of algorithmic trading on financial markets. This method uses advanced mathematical models for fast trading of securities, arbitrage, futures, binary options, currency pairs.In high frequency trading or trading algorithmic robots, special trading strategies are used, in which computers buy and sell assets within less than a second.
One of the high-frequency trading technologies or trade robots development incentives was the development of the front running strategy, in which various delays in the orders for transactions transfer give an advantage to those who have earlier access to the information. For example, this advantage is provided by the use of communication channels with a smaller delay.
Algorithmic traders have a clear idea of price movements and market structure, otherwise their algorithms would simply not work. The mathematical approach to the technical analysis of the market gives significant advantages, and hence a higher profit.
Advantages of the algorithmic robots:
No psychological issue.
In fact, it is still there, because a commercial broker is also a human being. The thing is that by using a trading robot, the psychological thing ceases to play a decisive role in trading and fades into the background. Bots do not panic and do not overestimate themselves, unlike live traders.
Market research by technical means
Algorithmic trader does not need to spend his/her money to accomplish some market research or a decade to learn to trade, looking at the charts, before he/she starts to generate a decent profit. Market research in case of algorithmic trading means the use of special programs that do quickly, efficiently and reliably all the work for trader.
One of the advantages of using a robot is speed. A trading robot can track dozens, hundreds of quotes, produce instantly complicated calculations, make decisions and immediately place bids.
The next positive thing about using trading robots is accuracy. The trading robot does not make mistakes (unless, of course, the error has crept into the program code when it was created), all input and output data can be calculated with an accuracy of several decimal points, if necessary. When submitting an application, robot will not randomly get an extra zero and will not put a comma sign in the wrong place.
Disadvantages of the algorithmic robots:
Complexity of algorithms.
The development and creation of a trading algorithm is a very complicated process, both time and money consuming. The trading robot will accurately execute all the orders according to the set algorithm. It sounds like a pro, but this fact can turn into a con. If the algorithm contains an error or inaccuracy, or the system crashes, the algorithmic robot will still open and close positions according to the set program, even if they lead to the discharge of the deposit. Therefore, the accuracy of the algorithm is very important.
As it has been mentioned earlier, psychological factor in the algorithmic trading fades to the background, but still it is present. So, very often algorithmic traders, especially beginners, begin to interfere into the trading process of their advisers. Here arises a question of trust: if you believe in your robot or not. If you do trust your development, then you can apply it to a real account and in no case interfere with its work until it becomes clear that an error has been made while elaborating the algorithm.
Algorithmic trading is now developing rapidly; the number of transactions opened by trading robots is steadily growing from year to year. This creates a high competition among algorithmic traders and forces to use more sophisticated algorithms. This trend is perfectly evident if you look at the stock markets. Barclay’s systematic trader index is the system trader’s return index.