Algorithmic Trading Basics
By definition, algorithmic trading is a way of placing orders in the electronic financial market
. When placing orders before, it is done manually but today because of the advancements in technology, placing orders can now be done using computer software, thus giving name algorithmic trading. It totally gets away from human intervention as everything from analysis up to the actual entering of price and quantity is done by the computer. This has now become at trend because basically if used on an appropriate market strategy, the profit that one will get is virtually unlimited.
Algorithmic trading can be used by almost anyone who wishes to trade in the financial market. However, large investors has been the most avid users of algorithmic trading basically to make sure that they will get profits from their investment especially when a bulk of their investment is not really from them but from their clients. The most common users of algorithmic trading include mutual funds, pension funds institutional traders, small time banks and many others. These traders usually have to wait for investments to come in from their clients and accumulate it to have a starting fund. Using algorithmic trading, these funds are divided into small market investments for minimum returns.
By investing into small yet many individual markets, loss is virtually reduced to zero and you get a positive cash flow. This is the reason why investing in mutual funds will almost always give you a profit from your investment. However, there have been many innovative ideas in the use of algorithmic trading that have come out to make it a better option compared to manual investing. This is by using high frequency trading. High frequency trading is basically a constant update to the status of the market. This will again serve as an input in a particular algorithmic trading and has more positive results than manual input. Before the input to algorithmic trading is done manually, but with high frequency trading, analysis to the market is way faster compared to human input which makes algorithmic trading more effective.
In the actual financial market, algorithmic trading can be used in most of the investment strategies. It can be used in arbitrage and delta neutral strategies. It can also be used in pair trading and trending as well as other existing investment strategies. The actual use of the investment strategy can be applied automatically by algorithmic trading in a process called autopilot wherein the entire process of making an investment need not be entered by a human. The software will just analyze the market constantly, apply the appropriate invest strategy and obtain the profit.
Truly, algorithmic trading has changed how investment is really done. It is used by many now because first, it does not need constant human intervention, reducing efforts and decreasing chances of mistake. Second, it is current as the status of the market is updated regularly and is more updated that human input. Lastly, in using algorithmic trading, you have a higher chance of gaining profit and less risk of losing what you invest. With these in mind, it is no wonder why many use algorithmic trading.
by: Julio Brick
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