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The picture of the financial markets has changed dramatically in recent years. The wildly gesticulating stock broker in large stock exchange halls who executes customer orders has long since ceased to exist. Technological progress has meant that exchanges now operate on high-performance servers. Computer systems process vast amounts of data in fractions of a second.
On May 23, 2011, the Frankfurt Stock Exchange abolished floor trading. As a result, all trading takes place via the XETRA electronic trading system. XETRA offers its market participants worldwide digital access. Buy and sell orders are often no longer carried out manually by a stock trader, but rather by automated trading systems based on preprogrammed trading rules in the form of an extensive trading algorithm.
Algorithmic trading strategies make trading decisions based on preset rules that are permanently programmed into the system. If the defined condition is met, the code carries out the trade automatically.
Advantages of algo trading:
Emotion-free trading: Most traders are often influenced by mood and emotions which lead them to ignore your rules and trading strategies. This often occurs when markets change, for example from a bullish to a bearish trend and vice versa. This is probably the greatest advantage of algorithmic trading systems, that psychological factors are completely eliminated and that there is no deviation from the given strategy.
Quick action: If the buy or sell condition is met, the system carries out one or more trading actions in a fraction of a second. While trading is in progress, the system scans various markets to find further trading opportunities. A human trader cannot compete here.
Day and night trading: An automated trading system can trade around the clock if this is programmed accordingly. This allows more trading opportunities to be taken. In addition, the time that the trader saves for analyzes and the waiting time for suitable signals is a clear advantage.
Error-free action: The prerequisite is the correct programming of the trading system. It can happen to a trader that he incorrectly analyzes various indicators. Computers do not make these mistakes within the given framework and execute the trades with the highest precision.
Disadvantages of algo trading:
Rigid trading system: Markets are constantly in motion and change cyclically. A change in the market can mean that a rigid system will no longer be profitable. The programmer has to react to these changes here.
Faulty Trades: No System Is Infallible! Algorithmic trading systems are based on historical data and experience. It is possible that in an instant the perfect entry for a trade will result, but the further course of the market will result in a loss. Traders with automatic trading systems need to be aware of this. No system can look into the future in order to act without errors.
Missing good trading opportunities: If the course of the price does not meet the conditions of the trading system, no trade is carried out. This can result in missing out on good trading opportunities.
Technological dependency: Probably the biggest disadvantage is the high technological dependency. Automated trading systems can run on your own computer as well as on a server. Loss of internet connection or a power outage can lead to loss of control of the trading position, which in turn can result in losses.
Algo trading conclusion:
Trading with automated systems has become an integral part of modern trading. Increasing amounts of data and new technologies lead to an increase in the trade in algorithms. Not only are institutional investors using algorithmic trading systems more and more frequently, but their popularity is also increasing among private investors. In particular, private investors resort to the algorithmic system if they are unsettled by their own losses in the past, or to trade independently of emotions. .
When using algorithmic systems, however, it should always be kept in mind that these systems do not guarantee profits at any time. As with manual trading, there is always the risk of total loss of the deposit. Accordingly, investments should only be made that can be absorbed in the event of a loss. In general, this also applies to any other type of investment!