AlgoTrading, or automated trading, is a trading method that uses algorithms to make buy and sell decisions in an automated manner. This method has advantages and disadvantages which we will list below.
Advantages of AlgoTrading:
- Speed of execution: Algorithms can make decisions in milliseconds, resulting in fast order execution, which is crucial in trading.
- Emotional Elimination: Algorithms are programmed to follow specific trading rules, which eliminates human emotions and biases that can influence trading decisions.
- Possibility of backtesting: Algorithms can be tested on historical data to assess their performance, allowing them to be optimized before using them in real trading.
- Ability to diversify trading strategies: The algorithms can be programmed to use different trading strategies, which helps diversify the trading portfolio.
- Ability to monitor multiple markets: Algorithms can monitor multiple markets at the same time, making it easy to catch trading opportunities quickly.
Disadvantages of AlgoTrading:
- Need for programming expertise: Setting up an AlgoTrading system requires programming skills, which can be a barrier for some traders.
- Hacking risk: The algorithms are based on computer systems, which makes them vulnerable to computer attacks. Traders should therefore take appropriate security measures to protect their system from AlgoTrading.
- Dependence on data: Algorithms are based on historical data, which may not always reflect current market reality. Traders should therefore be aware of this dependency and use real-time data if possible.
- No adaptability to unforeseen changes: Algorithms are programmed to follow specific rules, which can make them unable to adapt to unforeseen changes in the market. Traders should therefore monitor their AlgoTrading system and be ready to intervene if necessary.
- High costs: Setting up an AlgoTrading system can be costly in terms of development and maintenance, which can be a barrier for some traders.
In summary, AlgoTrading has advantages and disadvantages. Traders should carefully evaluate these factors before deciding to use this trading method. Advantages such as speed of execution, elimination of emotion and the possibility of diversifying trading strategies can be advantages, while disadvantages such as the need for programming expertise, the risk of hacking IT and high costs must be taken into account before making a decision.