Why Algorithmic Trading using automated bots?
“Bots! Huh? What do they know about trading?
The stock market only needs the understanding, time, and level of intelligence that people can have”, said my friend when I asked him about his take on algorithmic trading. Could it be true? Is algorithmic trading a hindrance? Well, not really, it’s actually the opposite.
40% of the NSE was done using algorithmic trading.
From its appearance, it seems that soon any trade will be made using algorithms. But why is that? Let’s Check some of the below-mentioned points in this article ahead:
- What is Algorithmic Trading?
- Benefits of Algorithmic Trading
What is Algorithmic Trading?
Suppose you have a strategy based on an analysis that you have built (or stolen) that works well for you. Let’s imagine that your strategy tells you when to buy/sell stock and when you can book a profit or cut a loss. This is the minimum empty strategy you should have. If yours isn’t, boy, you’re in trouble! So if you’re sitting at your desk drinking that Earl Gray, you do one of the following at any time –
- If you look at charts, quotes, or stories and try to find a trading signal according to your strategy
- Filling out the order details when you RECEIVE a trading signal (money time! Yay!)
- Monitor your trade to see if they have reached your target or gone the other way (as they usually do)
- Closing positions on any book benefits or minimizing losses
- Clean and repeat
You look like this while working (on average):
Now, remember, your strategy, no matter how successful on paper, is only good if you stick to it. Following your religious strategy is an essential part of making a profit over time. That means you don’t give in to your emotions, you don’t make guesses, you don’t book ahead of profit, or cancel a loss of standing because you think the stock will eventually go away. Let’s say you don’t do all those things, let’s say you follow your plan as a devout Catholic and you’re a superhuman person who knows his feelings well as a Buddhist monk (I know you’re not very close but let’s just say you exist).
Even after doing all this (reaching the level of superman/monk), you are not finished. There are still many things you need to do well before you can start making a real profit with your plan. For example, you need to go back and forth and refine your strategy to make sure it works in these changing markets. Having just one strategy will expose you to a variety of risks, reducing that you will need to differentiate and use at least two different strategies. And for this, you will need to keep scanning the markets for new commodities to trade that will fit your strategies, etc.
In short, in order to be successful in trading (especially in quantity), you have to behave like a superhuman person. But we both know that the truth is different. We often make mistakes, we often do things we should not have done and end up hurting, sad, and having a small net worth.
However, what if there was a way to get rid of most of this heavy and stressful work, what if someone pulled out his hair and shouted for loss, what if you just stood up (drank martinis) knowing that your strategy was well followed and you would eventually make money and the only job you had to do focus on strategy?
Let me make you that martini, and welcome you into the world of Algorithmic Trading. Algorithmic trading transfers cables to a computer. You need to write down your strategy in a language that the computer will understand and allow the computer to make a difficult suggestion for you. All the work you do during the day (mentioned above) as a salesperson is a natural machine and can be done mechanically in the best possible way. Computers can scan large stocks and place multiple orders per second (this is used in High-Frequency Trading or HFT), and automatic desk setup costs also decrease. The idea of allowing machines to perform normal tasks while focusing on high intelligence is a practice not only of trade but of everywhere. Read self-driving cars, smart houses, Siri, etc.
Benefits of Algorithmic Trading
Personal Emotions = 0
The machines have no feelings (at least for now, good luck google!) And we can use that to our advantage. In hand trading, this is a big risk. Fear and selfishness keep us from doing good. The machines do not cover their decisions in terms of any external factors as they simply follow the instructions in the system. When you see that most of the markets in the market are not driven by emotions, it automatically puts you on the back foot which makes Algorithmic Trading a necessity. Your strategy really gets the right opportunity if you throw emotions at the equation.
Accuracy + Speed = 100
The equipment is always accurate when it comes to dealing with equipment in the trade. For example, by filling out the correct order details, I have found myself making unreasonable mistakes in this department many times. I’m sure everyone has done this at least once in their trading life. Our inefficiency in terms of speed and accuracy can cost us great opportunities. Even a skilled trader will take at least 10-15 seconds to place an order, in the machine trading years 10-15 seconds are permanent and the price can go up considerably. This is especially true for HFT trading. The computer will then place and close 100 orders at that time.
Comfort = 1000%
Imagine for a second you were transposed into the karmic-driven world of Earl. This alone is reason enough to start learning Algorithmic trading. After all, part of the pressure was not mentioned when they traded for you as a career, so why deal with it now? I hope it’s a good feeling.
Scalability = level 100
Given the vast amount of computer power available today, we can use many techniques that can scan thousands of signals for trading opportunities, at the same time. This is not possible for humans by any means. Heck, we humans can’t even focus on one job for long and how can we do that?
Having said that, let me tell you a few important but important details about Algorithmic Trading here.
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