A New Investment Trend? The Rise of Algorithmic Trading Revealed
If you’ve ever wondered whether trading stocks and shares was something that tickled your fancy, you’ll be interested to hear that the trading industry is very much heading in an automated direction thanks to new technologies. Algorithmic trading has helped usher in an era of high-frequency trading that allows individuals and large hedge funds to generate profits at speeds that would be impossible for manual traders.
Think of an algorithm as an advanced stock trading tool that allows you to execute increased or more complex share dealing with greater efficiency. Alternatively, you can use algorithms to break your entry down into smaller orders to minimise visibility in the market and guard against spooking (i.e. setting off an unwanted chain reaction of events such as a huge sell-off when you’ve just bought an asset).
Retail traders (self-employed traders of stocks and shares) exist throughout the country, including in Kent. Our county is situated a stone’s throw from the City of London, which is also very useful for those retail traders wishing to meet with their brokers in person to discuss their trading account. Any individual with a technical background should be able to develop a trading algorithm that clearly defines instructions for computers to execute predefined trades. These instructions are usually based on buying or selling a stock at a certain price and time, or when a stock has experienced a predefined percentage loss or gain in the market.
Algorithmic trading has become increasingly popular as it is a more systematic approach to trading stocks, commodities and forex markets. In the past, financial traders have had to rely on their own intuition or market instincts to sniff out trading angles. Better still, algorithms that have been designed for use on the stock markets can also be backtested using historical data to identify how an algorithm would have performed in years gone by.
According to Hedge Fund Research, quantitative hedge funds will soon control multi-trillion-dollar funds. Assets under management by quant hedge funds have doubled since 2010 alone. Automated stock trading differs from human trading in three key areas. Firstly, machines are far better at managing risk than humans. Machines don’t feel emotion and will always stick to the stop losses or take profit figures that an algorithm specifies. Algorithms also execute trades with far greater speed and accuracy than any human trader can muster. We’ve seen in the past how human error has threatened to bring the financial markets to their knees, including the so-called paper crisis in the 1960s, and the 1980s’ Black Tuesday.
In essence, algorithmic trading suits all types of trading. Short-term traders an execute trades with lightning speed and precision, allowing them to get in and out of the markets with ease. Medium-to-long-term traders that perhaps use stocks to leverage risks held elsewhere in the markets can do so in large volumes by breaking up their orders into smaller trades without influencing the market and systematic traders can depend on their algorithms to follow trends more reliably than their own eyes.
There is no stopping the way machines are revolutionising the financial markets. The important thing for human traders is to find a way of leveraging machines to minimise costs and control their financial risk better than ever before.