Algorithmic trading significantly simplifies a trading process, and this is an incontestable fact proved by the figures that are well-known as stubborn. However, that is not to deny there are some negative developments connected with the trade robotic automation.
« The software reliability and positive work results directly depend upon the professionals involved in its development, diagnostic and maintenance. »
As failures of normal service lead to dismal results.
In winter 2010 Infinium Capital Management company lost 1 million dollars in a matter of seconds: 6767 oil futures purchase bids were sent on NYMEX in 3 seconds before the close of trading that led to decrease in the instrument price by 1.3% and caused great damage.
In 2012 the same happened on the Moscow stock exchange. The major player’s robot was buying futures at an overvalued price and underselling, processing transactions for a total amount of more than 70 million dollars. The owner’s damage made 140 million roubles (4.3 million dollars).
On August 1, 2012 the American company Knight Capital Group became bankrupt in 45 minutes due to false bids on different instruments on NYSE that resulted in the stock pricing change of 148 companies. KCG lost 440 million dollars.
These facts prove once more that when choosing the robot it’s necessary thoroughly study the program functionality, its developer reputation, as well as pay attention to the broker company offering it.
Despite the robotic automation errors the algorithmic trading popularity is growing and that stands to reason.
5 major advantages of algorithmic trading
Algorithm application greatly improves the trader’s and investor’s work, contributes to yield enhancement, as well as allows the small players to gain profit simultaneously moving by the robots of large companies. As it’s enough to determine their action logic and manually follow this strategy.
« This trading is profitable as the instrument liquidity increases, expand the possibilities of its regulation and prevention of acute price movements. »
So, why is this trading attractive, what are its prospects?
1. Accuracy, punctuality
Compared to people the robots don’t confuse the figures, don’t make casual price changes, don’t stay in the position longer than needed. Errors based on emotions, forgetfulness, unreliability and indiscipline are ruled out.
2. Order velocity
Robot velocity is almost unlimited: ability to send several hundreds of bids per second, heavy computing with a large number of indicators, simultaneous analysis of several price charts, snap decision making on the position entry or exit. A high velocity of data processing provides a higher level of yield compared to manual management.
3. No fatigue
Traders are not able continuously to be at the computer within the whole trading session, they need a rest and attention switch. In addition, when the unexpected private matters occur demanding urgent decision, a good position entry could be lost.
The machines don’t need a rest, coffee breaks, they don’t take a sick leave and vacation, they are not distracted by phone calls. They work 24 hours, all year round, with no breaks, weekends, work with maximum efficiency.
4. Great functionality
Robots work together with several hundreds of instruments. There are no limits for work scale – add new markets, types of assets, control time frames, integrate different functions to the advantage (SMS-notification, e-mail messages). There is no need to enlarge staff and rent additional premises.
5. Objective assessment
There is no risk of a decision error due to uncertainty, anger, fear, dissatisfaction. Triumph when getting profit and depressed state when losses occur lead to indiscreet transactions without reasonable grounds.
Computers don’t make such mistakes, don’t suffer because of losses, enjoyment doesn’t steal sense. External circumstances have no influence on them: problems in private life, prompts, persuasion of friends, analyst forecasts, intuition. They just continue to work in the standard conditions accurately following the set parameters of position opening and closing.
A couple of words about disadvantages of algorithmic trading
Taking into consideration the operation order, emotion and external stimulus nonsusceptibility, algorithmic trading has a number of advantages over manual trading. It provides accurate algorithm execution, maximum response velocity to price fluctuation, but it’s not able to change a man completely as has some disadvantages.
The program doesn’t change a strategy when the market changes occur. Only constantly practicing expert is able to notice in time the change of the market cycle, new patterns on the price charts, adjust the algorithms in accordance with the new developments.
It’s necessary to check the system regularly, reset in order to correct instability. It makes sense sometimes to suspend it and handle the inefficiency reasons.
Only technical analysis application
Programming could be executed basing on technical analysis only. Evaluation of such external events as the change of foreign policy situation, military conflict, natural disasters and other fundamental factors is not possible. Lossmaking actions would be still performed in such unfavourable events if not to change the incoming signals.
Any equipment application is connected with a risk of its work error, unexpected breakdown. Probable loss reasons: random failure, equipment damage, latent software bugs arising in critical situations.
This feature has been regarded as the advantage above. But it is also disadvantage: the transactions would be performed up to full account zeroing in a critical situation.
Is it possible to replace the manual transactions completely?
The general idea is that robots would completely displace a traditional trading soon, but this is an obvious exaggeration.
Human control and management are necessary, so a traditional trading wouldn’t disappear, if only smart machines would appear.
If a number of robotized transactions increases, the common traders could gain profit as usually, as the market would be still affected by the strategies of major players, follow human behavioural factor, otherwise marketplace trading would lose its point. Quite possibly the robotic application expansion would cause some difficulties for ordinary agents or vice versa would simplify everything. When make sense of major player’s actions, it’s possible to function the same way or advance them gaining profits. If the trading participants quickly adjust to the changing conditions, all innovations will bring positive results..