Similar to copy trading, algorithm trading, also known as black-box trading or automated trading or Algo trading is a procedure that uses a set of programmed PCs to place a trade in order, by following a set of guidelines aiming to earn profits at a speed which cannot be achieved by any human trader. It’s not the same as eToro’s copytrader (read this eToro copytrader review to know more) wherein you can automatically copy a real person and let the platform execute trades for you. This one is purely based on algorithm For algorithm trading to be effective, potential opportunities have to be identified. The profit earned can be either in terms of cost reduction or increased earnings.
Algorithmic trading plans are set according to particular rules, keeping in mind the price, quantity, time, and specific mathematical models. By implementing an algorithmic trading process, every chance of intervention by human emotions is eliminated. Thus, in no way can human behaviour affect trading activities.
Algorithm trading is being widely utilised in banks, mutual funds, pension funds, stock markets, and other financial areas to perform trades that are too quick for humans to comprehend. Below given are some ways in which algorithm trading is beneficial in stock market tradings
- Stop Loss Modification
If you wish to trade in the stock market, you have to regulate your portfolio and profits properly. One of the best ways of doing so is modifying stop losses. The stock market is extremely uncertain and unpredictable. At the same time, managing portfolios of every individual are extremely difficult. In this case, algorithm trading helps us to manage potential risk by providing us with easy solutions.
- Low Risk Of Manual Error While Placing Orders
Another benefit we get when it comes to algorithm trading is its accuracy. Since every operation is done by electronic machines, there’s no scope for errors. If the trading is entirely regulated by computers, automatically every wrong calculation or pitfall gets eliminated. When the process is manually done, it’s likely to have errors.
- No Interference Of Human Emotions
There’s no scope of human intervention. Every trade takes place following a set of rules and guidelines. Hence, people in no way can influence the terms or aspects of a stock market trade. As there is no human interference, there is no chance of errors. Thus, no longer can people make irrational decisions, driven by psychological or emotional factors.
If you are willing to invest in the stock market, study the market conditions carefully. Weigh every risk and challenge before you proceed to venture. You must also know every aspect of algorithm trading in the stock market such as system failure risk, network connectivity errors, time lags, execution of trade orders, etc. If you are willing to know more about algorithm trading, contact the best forex brokers in town.