Algorithmic trading, also called algo-trading or automated trading is becoming more popular among retail traders. Maybe this is because 43 percent of forex traders are millennials who are comfortable with using technology in their lives. The main reason for the popularity of algorithmic trading is the advantages that it has in comparison to trading manually.
What is algorithmic trading?
In algorithmic trading a computer program is used that follows a defined set of instructions to place a trade. These instructions form the so-called algorithm. The trading algorithm can be based on timing, price, quantity or any set of indicators.
The algorithm will monitor the market based on the defined set of instructions and will place buy and sell orders automatically when certain conditions are met.
Advantages of algorithmic trading
The most important advantages of algo-trading are:
It is obvious that a computer program acts faster than any human. Since the execution of trades happens automatically, no person would be able to keep up. The same goes for monitoring the markets or multiple indicators. An algorithm is better capable of recognizing opportunities at a greater speed.
There is a long list of things that can go wrong when placing a trade manually. Even the best trading plan does not exclude the possibility of making trading mistakes. Putting the wrong trading size or not setting a stop-loss correctly are common mistakes.
Execution at desired price levels
There is almost no time delay between the moment when a trading opportunity arises and the moment an order is being placed.
Reduced transaction costs
With algorithmic trading you spend less time monitoring the markets. In a world where time is money this can lower your transaction costs.
Taking human emotion out of trading
Research shows that emotional and psychological factors can have a huge impact on trading results. Fear, impatience and greed are just a couple of examples of emotional factors that can play an important role.
Back testing ability
In algo-trading it is possible to run an algorithm based on past data. This is called back testing. The back test shows whether the algorithm would have worked in the past. Although a back test is not a guarantee for future results, it can also be used to improve the algorithm before switching it live.
Despite the advantages of algorithmic trading there are also a few things to consider. Not every algorithm will perform equally well. A successful back test is not a guarantee for future results. The more complex an algorithm is the more back testing it will require.
Traders who want to run their own algorithm do need some knowledge concerning the technological requirements of algorithmic trading. Even then, there is always a risk of system failure, connectivity errors, time-lags or other problems.
Another requirement of algorithmic trading is the availability of historical data and access to market data feeds to be able to perform back testing.
Major Markets Trading offers access to two trading algorithms with a track record. Traders who would like to follow these algorithms do not need any technical or programming skills.
For more information about the trading algorithm that runs on the German DAX30 click here
For more information about the Major Markets Trading MT4 forex algorithm click here.