In this article of QuantVan , we want to know “The Magic of Algorithmic Trading” , by knowing the performance and its influence on market .
Investopedia: As you might know, Algorithmic Trading uses a computer program that follows a defined set of instructions to place a trade. These instructions are based on price, timing, quantity or any mathematical model.
Today, Algorithmic trading is among the most talked about technologies in the recent years. It has given trading Firms more power in the rapidly evolving markets by eliminating human errors and changing the way Financial markets are interlinked today.
There are typically two aspects of trading to which algorithms can be applied:
When to trade:
Algorithms can trade according to technical indicators, momentum, and fundamentals.
How to trade:
Algorithmic trading can also help traders execute orders more efficiently, from routing orders across different exchanges to slicing a large order into smaller pieces. also, Algorithms can help traders to execute their trades at the best price available according to the size of their trade, the time of the trade, and market conditions.
Benefits of Algorithmic Trading
If you want to know The Magic of Algorithmic Trading, first you should meet its Benefits on trading World:
- Accurate and instant trade order placement
- Trades executed at the best possible price
- backtested while using available historical and real time data
- Decrease of manual errors when placing trades
- Low transactions cost
- Human traders mistake (emotional and psychological factors) will decrease
Algo Trading in forms of different trading
short-term traders, market makers, arbitrageurs. Also algo trading aids in creating sufficient liquidity for sellers in the market.
Systematic traders or pairs traders. also, you Find it much more efficient to program their trading rules and let the program trade automatically.
Market Making Algos
Market making is about providing immediate liquidity to other participants in the market and being compensated for it. You take on inventory risk in return for positive expected value. Ultimately, the market maker compensated for two reasons.
Market-making ideally suited for Algorithmic Trading because a market maker is trying to capture the change in a spread by adjusting the price of multiple orders simultaneously
also, Market-making algorithms help to increase liquidity and price discovery, working as counterparties for traders in the market.
In the modern trading world, algorithms are important tool in a trader’s wheelhouse for improving trade execution.
whether that trader is an investment firm or a single day-trader.
you can use algorithms on nearly every aspect of trading, from choosing when to place trades for market-making and arbitrage algorithms,
to achieving better pricing and execution on trades.
Simply using algorithms alone won’t guarantee profits, but employed properly, they can help traders of their trading strategies and manage volatility.