Such algorithmic trading has surely increased in the previous years. Does this help in improving the market quality and should you encourage this? There are many of those who say that algo trading would help to improve the liquidity as well as it boosts the informativeness of such prices and quotes.
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. Since the algorithms were written in advance and they were executed manually, then the primary advantage is speed. The speed wherein those trades are made is actually measured in just fractions of a second and this is much faster than what those humans actually 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.
Accuracy is also a benefit to algo trading. When the computer is automatically doing a certain trade, then you would be able to avoid such pitfalls of accidentally placing in the wrong trade associated with those human trades. Through manual entries, it is a lot more likely to purchase the wrong currency pair or such wrong amount as compared to the computer algorithm which has been double checked to ensure that there is correct order entered.
One of the largest benefits of algo trading is such ability to remove human emotion from those markets, trades which are constrained in a set of predefined criteria. One great reason why such is really a benefit is the fact that a human trading would be prone to a lot of emotions and this would cause irrational decisions. The two emotions that would lead to a poor decision that algo traders aren’t made susceptible too are fear and greed.
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.
A great benefit that you can get from automated trading is such reduced transaction costs.