Algorithmic trading techniques enable the execution of orders using automated pre-programmed trading instructions that take into account a number of variables such as price, time, volume, and quantity.
What is Algorithmic Trading?
Utilising automated pre-programmed trading instructions that take into account a variety of factors, such as price, time, volume, and amount, you can execute orders utilising Algorithmic trading techniques. Traders have access to a wide variety of sophisticated algorithmic order types, such as TWAP and VWAP, which they can use to conduct transactions.
What are the Benefits of Algorithmic Trading?
There are several advantages to Algorithmic Trading. employing algorithms, as opposed to placing a single larger order, almost always results in better trade execution outcomes for the user. This is the single most important benefit of employing algorithms. They accomplish this goal by reducing the impact that your orders have on the market. In addition, the use of algorithmic trading lowers execution risk (that is, the probability that an order spread carried out over a period of time would trade at the day’s high or low price).
Because algorithmic order techniques transmit orders based on pre-determined settings and can do so even when you are not even at your trading platform, this not only removes the element of emotion from trading but also allows you to trade more efficiently. As an illustration, if you have placed an order to buy a stock at the price that has been the average over a given length of time (a VWAP order), then the algorithmic order will continue to execute during the allotted time period, subject to the price limit or volume restriction that you have set.
The fact that algorithms can typically respond to price swings more quickly than human trading can, which results in improved order execution, is another advantage. You will also save time using algorithms. Your algorithmic orders will receive the best possible results as a result of the continual back testing and refinement that our algorithms go through.
As a consequence of this, better results in terms of execution may be attained, hence saving investors money.
What are the Key Risks of Algorithmic Trading?
There are risks associated with unfavourable or unexpected market movements, as well as risks linked with general market liquidity, when any trading order is put in the market.
There is a possibility that the algorithmic order will not be successful in accomplishing the goal that it has set for itself. In the case of a Volume Weighted Average Price (VWAP) order, for instance, the actual volume traded might not match the projected volume curve over the time of the order. As a consequence of this, the traded average price might not be the same as the volume weighted average price.
Because of the parameters that were chosen for the algorithmic order, it is possible that the order will not be completely fulfilled for one or more of the following reasons:
- There was not enough available liquidity within the price limit that had been programmed for the algorithmic order
- The “Max% Volume” setting for the algorithmic order being lower than the order volume, which is higher
- There is a possibility that trading in the stock may be halted or that trading will be restricted for all or part of the trading day
What are the Benefits of Algorithmic Trading?
One of the primary reasons for the rapid growth in popularity of algorithmic trading is the numerous benefits that it provides in comparison to traditional manual trading. The benefits of algorithmic trading include increased speed and accuracy while also lowering transaction fees.
The primary benefit is increased speed, which is achieved through the use of pre-written algorithms that are then automatically carried out. The pace at which these trades are executed can be quantified in fractions of a second, which is significantly faster than what humans are able to comprehend. Algorithmic Trading can also help you build an investment portfolio in a systematic long term way.
The following is a list of additional advantages:
- Speed and efficiency: Since transactions are automatically placed based on predetermined rules, algorithmic trading enables quicker trade execution. This can be especially useful in rapidly moving markets, when prompt execution is of the utmost importance.
- Elimination of human emotions: Because trades are carried out in accordance with predetermined algorithms, algorithmic trading eliminates the possibility of emotional bias in decision-making. Making judgements based on your emotions frequently results in bad trading outcomes.
- Back testing and optimisation: In order to evaluate the effectiveness of algorithmic trading systems, it is possible to use previous data to conduct a back test. Before putting their techniques to use in real-time trading, this gives traders the opportunity to hone them and find any potential weaknesses in them.
- Automation and multitasking: Algorithms can constantly watch the market and perform deals, which frees up the trader’s time to focus on other tasks or analyse a greater number of possibilities. Traders can take advantage of this by analysing extra opportunities.
- Reduced Manual Errors: Algorithmic trading reduces the likelihood of human error, which can lead to losses due to mistakes like entering the wrong deal size or completing a trade at the wrong price.
What Algorithmic Trading Strategies are Available to Investors?
Today’s investors have access to a variety of powerful algorithmic trading algorithms, and these strategies have a tendency to produce reliable results.
Traders and investors who are curious about the potential of algorithmic trading can readily use the aforementioned tactics, which have a long and successful track record.
We have compiled some of the most frequently used methods here:
- The volume-weighted average price (VWAP) finds a happy medium between execution and the anticipated volume of trades that take place over a certain time period. As an illustration, a VWAP order might choose to buy or sell a bigger proportion of the order at the first and last hour of trade because there are normally more market transactions during those times.
- The Time-weighted average price, often known as TWAP, refers to a trading method that involves spreading out trades over a certain amount of time. It is often utilised for the execution of big orders with the goal of having as little of an effect as possible on the prevailing market price.
- Target Open is a technique that aims to participate in the Market Opening Price Auction up to a limit price that has been predetermined. If there is still volume on the order that has not been executed after the market’s Opening Price Auction, the approach will attempt to execute the remaining balance of the order up to your limit price while minimising the effect it has on the market.
- Target Close is a strategy that aims to maximise one’s participation in the market’s Closing Price Auction up to a predetermined limit price. If it is determined that doing so is necessary to reduce the market’s impact for the market’s Closing Price Auction, then this strategy may additionally execute some of its volume prior to the market’s Closing Price Auction.
