Remember that algorithmic trading is just another term for automated trading. Therefore, we will essentially be discussing the benefits and adverse effects of an automated trading system.
Just as everything else in life, which has advantages and disadvantages, the forex industry isn’t exempted from this equation. Everything the forex, futures, and stock market comprises including automated trading has its pros and cons. Looking at how auto trading brings out more flexibility and ease of operation, one would struggle to believe that it has a downside. There are several benefits derived from auto trading, some of which are;
It minimizes emotion.
Emotions are fluctuating feelings that tend to affect traders’ ability to stick to a plan. They allow traders to take actions not included or following their trading strategy. Some of which include; over-trading, fear of entry, fear to pull out of a trade, and even greed.
But automated trading executes trade automatically based on programmed trading rules, thus leaving no avenue for emotion. There is the elimination of fear of entry as the computer automatically enters the trade immediately it recognizes conditions of the trading rules and vice versa for exits. Therefore, automated trading is more strategy-based than emotion-based.
Allows Back Testing
Another benefit of algorithmic trading is the ability to back-test your trading idea before risking money in the forex, futures, or stock market. With backtesting, a trader gets the opportunity to check the profit and loss rate (%) of one’s strategy.
That is, by testing one’s trading idea on historical data of the market. This helps to fine-tune such an idea based on a careful evaluation to maximize its profit ratio.
With the automated trading system, traders have the opportunity to spend more time on market analysis than trading. After setting up trading rules for the software, the traders spend less time executing trades. But instead, get more time to observe the market and develop a more in-depth analysis of the market.
Improved Order Speed
Automated trading systems instantly execute a trade; immediately, it recognizes the programmed trade criteria. While also setting up the program to take profit and stop loss simultaneously. This helps to significantly speed up the time spent between trade entry and a manual set-up of TP and SL.
The volatile nature of the futures, stock, and the forex market is such that seconds can differentiate between loss or gain. Therefore, auto trading maximizes time by setting up all needed parameters at the point of entry.
Trading Diversity Strategies
Apart from being able to carry out instant market execution, auto traders can also trade multiple markets and accounts. The system scans various markets, currencies, stocks, and commodities looking for which meets the trading rules for entry.
If possible, it identifies multiple entry positions in several markets. It can open diverse trades in all markets according to entry rules and monitor all transactions in milliseconds.
Downsides Of Automated Trading.
Just like every other machine, the automated system is liable to mechanical faults. Some automated systems lie on a computer and not a server. Thus, if there is a loss of internet connection, the order might remain on the computer and not get to the server.
Also, there tends to be an inconsistency between theoretical trades and actual trades executed initially.
Contrary to public opinion, the automated system still requires human monitoring. A system still needs to be observed to prevent losses that may arise from technical glitches (power outage, computer crash, etc.)
Also, you’ve got to monitor your strategy, which has no trading plan and is 100% perfect in forex, futures, or stock. They all come with profit and loss.
Automated trading does a lot for a trader, but for a beginner with no experience, it might seem complicated. And since forex, futures, and stock trading have no foolproof approach, manual monitoring of trades is advised.