The algorithmic trading has greatly increased in the past years. Does this help in improving the market quality and should you encourage this? There are a lot of those who are saying that algo trading helps in improving such liquidity and also boosts the informativeness of the quotes and prices.
A big reason why the algorithmic trading has become really popular is the due to the benefits that such holds over trading in a manual method. The benefits of such algo trading are related to accuracy, speed and also reduced costs. Because the algorithms were actually written beforehand and they are executed in a manual way, then the main benefit is speed. The speed wherein those trades are made is actually measured in just fractions of a second and this is much faster than what those humans actually perceive.
Algorithm trading has the benefit of scanning as well as executing on the different indicators at a speed that no human is able to do. Due to the reason that the trades are being analyzed and they are done in a much faster way, then you will surely have more opportunities and they are made available at a lot better costs.
Also, a benefit to such algo trading is accuracy. When a computer can execute a trade automatically, then you will be able to prevent the pitfalls of putting the wrong trade accidentally which is common in human trades. Through manual entries, it is a lot more likely to purchase the wrong currency pair or such wrong amount as compared to the computer algorithm which has been double checked to ensure that there is correct order entered.
What is a big benefit to this kind of trading system is that this has the ability to get rid of human emotion from such markets and the trades are actually constrained in that set of predefined criteria. One great reason why such is really a benefit is the fact that a human trading would be prone to a lot of emotions and this would cause irrational decisions. Such two emotions which lead to poor decision which algo traders are not susceptible to are greed and fear.
Being able to backtest is also a benefit from algo trading. It can be difficult for the traders to know the parts of the trading system work and what doesn’t work because they cannot run their system on previous data. With algo-trading, you can surely run the algorithms based on past data to be able to see if such worked in the past. This kind of ability would give you a huge advantage because this allows the user to eliminate any flaws of the trading system prior to running such live.
A great benefit that you can get from automated trading is such reduced transaction costs.