By Pawan Matade, Founder, DeMatade Trading Solutions
In the quest to make profits, traders invest in stocks. However, it is a mundane and highly time-intensive task to keep a strict watch on the movement of the market. This requires extensive experience which is always believed to be for people who can make healthy financial decisions. As the role of humans is diminishing with the advancement in technology, algorithmic or automated trading is emerging to play a significant role in evolving the conventional trading market.
With carefully pre-defined instruction, automated trading carries out human-oriented tasks seamlessly. It uses data-based intelligent algorithms to identify the right opportunities to buy or sell stocks with greater accuracy. Algorithm trading has already gained huge popularity in the market and expert traders are weighing its pros and cons to scale efficiently and reap maximum benefits.
Reaping the benefits of automated trading
Technology is developed to bring convenience to a process. Similarly, algorithmic trading comes with numerous advantages for better analysis of market data. Unlike the traditional way, automated trading allows traders to execute bulk orders in a single go with much more efficiency. It enables the trader to trade through multiple accounts while utilising various trading strategies all at once. Carrying out the same task manually might require days in execution; however, automated trading completes in milliseconds.
In addition, automated trading eliminates human intervention i.e. there is no influence of human emotions in trading that reduces the chances of losses. It ensures there is no human interference and the traders get the maximum ROI through the use of data-based algorithm. As a result, the profit margin significantly increases to conventional trading methods.
One of the most sought-after features of automated trading that make it stand out is back-testing. It boasts the ability to apply trading rules to previous market data and determine the viability of the strategy. Before executing the rules, automated trading conducts back-testing i.e. rigorous execution of rules to nullify the chances of execution failure to the maximum extent. As a result, the trader enjoys the maximum percentage of accuracy and gains huge profits.
Furthermore, when a trader uses multiple strategies and accounts for trading, the risk spreads across asset classes. This helps the trader in diversifying their portfolio while reducing the possible chances of uncertainties and increasing profit margin.
Cons of automated trading
Automated trading systems work on pre-defined algorithms. Since they are backed by technology, there are chances of failure of these systems. If any failure occurs, the trader can experience a negative impact on his profit margins.
Although the execution is automated, it still needs some sort of monitoring. The system can host several technical glitches including system failure, power cuts, loss of internet connectivity, etc. This can result in incomplete orders and might bring glitches in the entire process of trading.
Trading needs deliberate shortlisting and management of strategies. Since trading strategies are already pre-defined, automated trading can impact the live market performance of the trader. Uncertainties can prevail in any market and an automated trading system has to be extremely reliable and intelligently made to adapt to unanticipated market conditions.
Automated trading benefits traders who are keen on investing in the stock market yet lack the time and experience to generate profits. The pre-defined rules and algorithms feed the trader with the right strategy that needs to be undertaken at the right time. Despite several cons, automated trading has picked up an unprecedented pace in the market that has significantly improved the profit margin of traders. Technical flaws are common and to address that, a trader should invest his resources and trust in a system that offers minimised technical failures and is backed by a sound technological framework.