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Algorithmic trading: automation is the future

Hi there! In this blog I will deep dive into the future of trading: automation.

The state of trading today

The finance sector has become deeply intertwined with technology, and we have gotten to the point where trading the stock market using human analysis and thought has been relegated to the lower rungs of the investor class. While some retail traders may still rely on following the news in order to deduce information to make trading decisions, retail and institutional traders who trade on the markets with millions, or ev billions of dollars, depend on algorithms to ensure the best execution on trade. Algorithmic trading, also known as Automated Trading, enables traders keep costs low, execute trades at the speed of light, and maximize returns on investments which is particularly important to traders who include debt in their capital pool.

Automated trading involves the use of programs in trading the financial market. The programs follow instructionspre-set in the code to determine what trades to make and when to exit.

For many traders who apply automation to their trading activities, the major draw is dissociating emotion from trading decisions. Why? Because, for example, it's incredibly hard to pull out of Teslastocks if you happen to be a huge Elon Musk fan, even if all the indicators point to the fact that the stock is trading way above its true value and is set to crash. Where would you find the courage required to "betray" your idol?

Algorithms have no such emotional ties. Their decisions are strictly based on what the data indicates, and while they are by no means perfect, their use still increases the likelihood of a trader maximizing ROI.

Why has Automated Trading become the norm in Financial Markets?

Investment decisions are built on an aggregation of data. From time immemorial, investors have had to churn large datasets in order to build the knowledge-base required to make critical investment decisions. This has become more complex over time.

Today, unlike in time past, globalization means something happening in a remote part of China could affect the entire industries on the NYSE in distant USA. No human mind can contain the amount of data being produced on an hourly basis, talk more of processing it. This is why automated programs have been leveraged for the execution of up to 80% - 90% of trades in financial markets across the globe.

Traders can have their programs customized to fit their goals. The rules that are encoded could be based on simple conditions like a moving average, or they can be based off of a complicated strategy. Programs requiring complex and customized rules usually require working with a qualified programmer who has in-depth understanding of the programming language specific to the trading platform in use, while those with much simpler oals can use off-the-shelf programs.

Automation is a boon to financial markets and the traders that operate within them. Algorithms enable the trading of humongous volumes of capital in seconds, and are responsible for equally humongous returns for those involved. However, benefits are not just restricted to traders, markets also benefit from the emotionless and data-based trading. Algorithms increasingly make it easy to find the true value of a stock, make market adjustments in small steps, and they hold the promise of a stock market free from major market swings.



No Emotions: Ruthless Efficiency

Unlike humans, algorithms are free from emotions. The human emotions which dominate financial markets are greed and fear. These emotions are responsible for building huge market bubbles and they are also responsible for popping those bubbles and causing catastrophic Mar. When greed or fear are at play, investors tend to throw their investment plan out the window and react to market movements, further exacerbating market conditions.

Automated Trading prevents these sorts of swings because algorithms stick to the plan and make the most efficient and effective decision at any moment in time to achieve the pre-programmed goal.


Strategy Simulation: Forecast Wins andLosses

Strategy Simulation is made possible by introducing algorithms to trading. Automation allows traders to test their strategies using historical data, and this allows them have an idea of what results to expect historical patterns repeat themselves.

This is particularly important for automated Trading because the rules programmed need to be as precise as possible before the algorithm goes live. Otherwise, traders stand to lose their capital. Once the strategy is verified, the algorithm will follow the rules to enter or exit an investment in a manner that achieves the trader's goals efficiently and effectively.


Multiple Trades, Multiple Strategies

Financial markets dissipate the illusion of humans being capable of multitasking. Or perhaps they just reveal our limits. This is not the case for algorithms. Automated Trading enables an investor to trade in multiple markets and on a variety of instruments using a variety of strategies, while at the same time monitoring each to minimize the possibility of losses and maximize the trader's ROI. And all this is done in seconds.



Widespread Availability of Software from dodgy Providers

Certain software providers promise exceedingly high returns and platform capabilities to prospecting traders. Traders who are too desperate for unreasonably high returns or too inexperienced may fall prey to these scams.


Algorithms Made by UnqualifiedProgrammers

Unaware traders who fall victim to unqualified programmers may be "lucky" enough to only end up wasting valuable time and money, others who are not so lucky may activate the software and rack up irrecoverable losses.



The advent of online tutors on services such as YouTube, SkillShare, etc., have made the "Do It Yourself" trend into a culture. Figuring out how to setup your IKEA furniture may not cause any problems, but it will prove too risky for a trader staking their capital and/or debt on a trading strategy. One wrong line of code could lead to unfathomable consequences, imagine what would happen if you have multiple of them.



The largest financial institutions and funds in the world rely on algorithmic trading techniques to automate their trading process, but they don't abandon the entire trading process to the algorithm, multiple checks and validations are still carried out by humans to ratify the process before automation is employed.

As financial markets become more complicated, all traders will eventually need to adopt Automated Trading if they are to achieve any measure of success. If you haven't already, now is the best time to begin your Automation journey.


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