Algorithmic Trading: Overview, Examples, Pros & Cons (2024)

This article is beneficial for the beginners of algorithmic traders in which we discussed all the algorithmic trading strategies in the market. If you invest the money through algorithmic trading, you have to check the algorithm from time to time to secure the money.

What is algorithmic trading?

The algorithmic trading in which the trader has to participate in the financial markets before pre-set rules for entering and exiting trades. One of the significant benefits of algorithmic trading is saving your time to constantly watch the needs.

What are the advantages of algorithmic trading?

These are the advantages of algorithmic trading is:

• Low transaction costs: The transaction cost of Algorithmic trading is low because of the lack of human intervention, and one of the major reasons is that multiple trades are processed at the same time.
• Minimize the market impact: Big traders change the market price by buying and selling large quantities of securities in the market. But on the other side, algorithmic trading helps to identify how much time is required to complete transactions in divided parts. For example: If an investor wants to purchase a 1 million share of Tesla. The trader might buy 2000 shares every 10 minutes; then, it will be accessible to traders with algorithmic trading without human involvement.
• Advanced decision making: Algorithmic trading helps traders make a decision in advance because the trader has to predetermine the set of rules and price of futures trades.
• Accuracy: When the time to set the price for the future trade is restricted, human involvement is restricted in trading, the trader only checks the algorithm from time to time to find any mistake and analyze the technical indicators. The trader knows very well that the computer programs do not make such mistakes in algorithmic trading.
• Multiple trades at the same time: The trader can only set the price and the future dates of the transactions so that the trader can set the multiple trades at the time, and it helps to diversify the portfolio in the market. Because without the help of algorithmic trading, it is difficult to manage by the traders.
• Minimization of human emotions: One of the major advantages of algorithmic trading is that once you set the price and date for the trading, you couldn’t question and rethink the trade.

What are the disadvantages of algorithmic trading?

• Mechanical Failure: The trading is completely dependent on the software, platform, and internet connectivity. If your trading system lost the internet connection and your order was not sent to the market. Then you couldn’t invest their money in trading. On the other hand, if you invested their money through automated trading, then you have to invest a small amount of money.
• Depend on technology: The automated trader is entirely dependent on the technology because in which human interference is restricted after setting the price of the securities. If any uncertain condition is reached on the market, the order will be sent for execution.
• Requirement of resources: The cost of transaction is low, but on the other hand, this trading requires a high level of technology and a strong internet connection for trading.
• Inability to understand the market: The system cannot understand the market situations like human minds. So, before investing the money in automated trading, the trader has to research and take a great decision against it.
• Loss of human control: This is completely automated trading in which the involvement of humans is only when setting the price of the assets and the future date of transactions.
• Not applicable on all strategies: This type of trading is basically for excellent strategies; it does not apply to all the strategies because all the strategies cannot be converted into algorithmic trading.

What are the trading strategies of algorithmic trading?

These are the algorithmic trading strategies in the market:

• Trend following strategy: This is one of the most common trading strategies for algorithmic trading. In which the trends are using the moving average, price level movement, breakout, etc., in this strategy, the trader doesn’t require any prediction of price.
• Mathematical follow based strategy: Some of the mathematics models are allowed, such as delta-neutral and the combination of options and underlying securities.
• Mean Reversion: It is a strategy which depends on the high or low price of an asset. The main motive of the strategy is to identify the concept of the price range and thereby implement the algorithm.
• Volume weighted average price (VWAP): This type of the strategy uses a large order and release of chunks of order (uses the historical volume profile for single stock). It executes the order close to the volume-weighted average price (VWAP).
• Time- Weighted Average Price (TWAP): This type of the strategy uses a large order and release of chunks of order (uses the divided time slots between a start and an end time). It executes the order close to the average price between the start and end times.
• Percentage of Volume (POV): This type of strategy in which the algorithms send partial orders according to the defined participation and ratio, and volume.

Why use algorithmic trading by the investors?

• Neglect human error: The trader letting emotions gain profit and cutting the losses.
• Maintenance is low: The trader can set the algorithm and allow them to trade according to your schedule 24 hours a day, five days a week.
• Backtest: This strategy helps to select the best assets to buy and sell in the future (because it shows all the data of the assets)
• Vast opportunity: The trader can choose the algorithm according to the strategy and maximize the opportunities in the underlying market.
• Supplement the existing strategy: The algorithm helps manage the risk of losing money because it implements the stop and limit on behalf of the traders.

What is automated trading?

Automated trading is the same as algorithmic trading, in which the trader also sets the currency’s price to buy in the future. Then, the software automatically purchases the currency on behalf of the trader. Most of the big traders use this trading to invest their money in the market because it reduces the cost of the transactions.

What is the best trading software for algorithmic trading?

These are the software of algorithmic trading is:

• MetaTrader 4

It is one of the popular trading platforms in the global market. In this platform, the trader can customize the indicators and tools for trading. MetaTrader 4 is a special application for the trading platforms; it doesn’t require any special knowledge and programming skills; it only needs knowledge of the market for trading.

These are the features of the MetaTrader 4:

• It is one of the wide selections of trading applications.
• The trader has the option of 1700 trading robots, 2100+ technical indicators, which is divided based on the traders.
• In this platform, the trader has a wide range of payment methods such as debit card, credit cards and many more. ‘
• It is entirely a secure platform for traders.
• It is the demo account for the beginners in the market to test the trading strategy and select the best one for trading.
• The platform also provides the paid indicators and tools for trading.

Which is the best broker for automated trading?

• ROinvesting

ROinvesting is the old broker that is regulated by the Cyprus Securities and Exchange Commission (CySEC) providing services since 2015, and it is the representative name of Royal Forex Ltd. The brokerage giants offer 350+CFDs assets, including forex, stocks, crypto, commodity and metals.

The broker uses the MetaTrader 4 platform for trading. The broker also offers commission-free trading to all the account holders. In addition, the broker provides educational material to the traders such as articles, tutorials, VOD, ebooks and courses.

• HFTrading

It is the brand name of CTRL Investments Limited, and it was founded in 2019. HFTrading is regulated and approved by the New Zealand Financial Markets Authority (FMA) and the Australian Securities and Investments Commission (ASIC). The broker offers 350+ CFDs instruments on a variety of assets like forex, stocks, crypto, commodity and metals.

The broker uses the MetaTrader 4 platform for desktops, mobile and web trading. The head office of the HFTrading is located at Level 13, 1 Albert Street, Auckland 1010, New Zealand.

The Bottom Line

This is the complete article on algorithmic trading, and we discussed all the aspects of algorithmic trading. Lastly, we say 70-80% of the investors use this trading because it is helpful to invest on multiple assets simultaneously. On the other side, the computer software that can invest their money in trading if anything happened and lost the connection will be the loss for the traders.

Is algorithmic trading legal?

Yes, algorithmic trading is legal in the market, but some traders have objections regarding how they impact the market. There are no set of rules and regulations for the retail traders for the use of algorithmic trading.

What percentage of the market is algorithmic trading?

In the US, 70 – 80% of the traders (stock market and all the financial markets) use algorithmic trading in the market to generate profit.

Who uses algorithmic trading?

Institutional investors and big brokers generally use this trading to cut down the value of the transaction cost in the market. According to the experts in the markets, this trading is beneficial for the large traders that comprise the 10% of overall trading volume.