The algorithmic trading has greatly increased in the past years. Does this help in improving the market quality and should you encourage this? There are a lot of those who are saying that algo trading helps in improving such liquidity and also boosts the informativeness of the quotes and prices.
A big reason why the algorithmic trading has become really popular is the due to the benefits that such holds over trading in a manual method. What you must know is that there are many benefits that you can get from algo trading like reduced costs, speed and accuracy. Due to the reason that such algorithms were written in advance and done manually, then the main benefit is speed. The speed in which such trades are made is measured in only fractions of a second that is a lot faster than what humans are able to perceive.
Algorithm trading has the benefit of scanning as well as executing on the different indicators at a speed that no human is able to do. Due to the reason that the trades are being analyzed and they are done in a much faster way, then you will surely have more opportunities and they are made available at a lot better costs.
Also, a benefit to such algo trading is accuracy. If the computer is robotically executing a particular trade, then you could avoid the drawbacks of accidentally putting in the wrong trade which is associated with such human trades. With the manual entries, it is more likely that you would buy the wrong currency pair or that wrong amount unlike the computer algorithm that has been double checked to make sure that a correct order is being entered.
A big benefit of such algo trading is that this is can remove human emotion from the markets and the trades are placed in a set of predefined criteria. The reason why such is an advantage is because those humans trading are susceptible to such emotions which may lead to irrational decisions. Also, the two emotions which may cause poor decision but the algo traders are not exposed to are greed and fear.
What is also great about algo trading is such ability to backtest. It can be difficult for the traders to understand the parts of the trading system which actually work and what doesn’t because they are running the system on past data. Through the algo trading, you may run the algorithms according to the past data in order to see if it would have worked previously. Such ability gives a big advantage since it lets the user remove any flaws of the trading system before running this live.
One excellent benefit that you can have from automated trading is the reduced transaction cost.