Automated trading accounts for 60 to 73% of the overall trading volume in all the major markets such as the USA, Europe, and Asia.
Algorithmic trading has revolutionized the way trading is conducted in the market.
It's the tool that helps you not just keep up with the fast-paced market but also stay ahead of the curve in it. Traders are coming up with unique strategies that harness the power of automation to minimize risk and maximize gains.
Let's take a look at how automated trading can help you gain a competitive edge in the market and grow as a trader.
How automated trading can give you a competitive edge
Automated trading or algorithmic trading refers to carrying out trade in the market with the use of a program with predetermined rules and patterns. It’s a fairly popular method of trading. It significantly improves a trader's success rate while reducing the margin of error.
Due to the ease and accuracy it provides, automated trading has seen a continued rise with more and more traders trying their hand at it.
In this article, we'll decode how automated trading can help give traders a competitive edge in the market no matter if you're a beginner or experienced trader.
More importantly, how to make the most of automated trading to build sound strategies and grow your portfolio.
1. Make faster decisions
One of the biggest, most palpable advantages of using automated trading to conduct your trades is how quick and efficient it makes your decision-making. All you’ve to do is set up rules for trade entries and exits in your trading system/platform and it takes it from there.
It’ll execute those programs on its own, performing accurate trades that bring calculated results. It takes emotion out of the equation and performs transactions faster, allowing you to trade more than you'd be able to do manually.
You can implement a strategy quickly, test different versions of something, conduct complicated analyses, and process data faster and better. This allows you to evaluate market trends better and apply strategies to a vast number of situations.
Having such an efficient setup for your perusal motivates traders to trade more. This is reflected in the exponential boom we've seen in the volume of automated trading that is conducted in the market today.
2. Implement effective strategies with ease
The introduction of automation in trading has led to the rise of unique strategies that would not have been possible in the days of manual trading. They take advantage of the fast pace of their operation and analysis to get ahead of the curve and maximize the earning of the investor.
Given below are some of the top automated trading strategies that will help you up your game and unlock new potential in the market:
1. Arbitrage
Arbitrage refers to taking advantage of an imbalance in the price difference between two markets. If you spot such an imbalance, capitalize on it with a combination of matching deals. Make sure that the transaction happens at the same time.
2. Index fund rebalancing
Index funds are usually deposited in the retirement accounts of people. They need to adjust the portfolio to rebalance themselves in order to match the new prices from time to time. This strategy exploits the index rebalance effect.
3. Market timing
Market timing strategies track trends in the market to take advantage of them. They do this by backtesting, forward testing, and live testing. Moving averages and pattern recognition act as identifiers of trends to be capitalized on.
4. Mean reversion
Mean reversion strategies work on the idea that every stock has an average price point around which its price will always dance. The strategy involves determining the average price of a stock based on its trading range, highs, lows, and earnings over a period of time.
5. Pairs trading
Pairs trading refers to pairing two assets that’re essentially 'long' and 'short' in nature. It’s a market-neutral strategy that takes advantage of the discrepancies between the value of related securities.
6. Scalping
This day trading automated strategy tries to make the most volume out of a profit, however small it may be. It requires knowledge of exit and access to live feeds for smooth execution. Though it focuses on small gains, you can make bigger gains out of it with practice.
3. Ensure backtesting of your strategies
Backtesting is the process of gauging the performance of a strategy or model based on historical data. You don't execute a strategy, simply test out how it’ll perform based on the data you already have.
Backtesting allows you to test out various ideas or their variants before implementing them in the market. It's only possible because of the fast-paced operation of algorithmic trading and was not possible in the days of manual trading.
Here’re some of the key benefits of backtesting:
- You can test different versions of one strategy quickly.
- Run tests on multiple strategies at once.
- Minimizes the risk to a huge degree.
- Allows traders to go for bigger trades and earn bigger profits.
However, something important to note here is that every aspect of the testing process should be defined in the system.
The computer cannot make guesses or decide for itself so you need to set a precise set of rules for it to follow and conduct the testing accurately.
4. Identify opportunities by merging with trading bots
Trading bots are a powerful automated trading tool that helps advance your automated trading. They’re programs that put algorithms to use and help traders identify opportunities they can capitalize on as well as make informed decisions.
Here’s what trading with a trading bot entails:
- Program the bot with trading strategies of choice and specific parameters. For example, specific times to open and close positions, the exact amount to invest, and options of investment to choose from.
- The bots use the information provided by you, coupled with the real-time analysis it conducts of the happenings of the market to assess the potential for profit with each strategy.
- The bot’s internal analysis will help you determine your trade decisions with better accuracy and efficiency. It can tell you the most opportune moments to enter and exit the market or buy and sell securities.
- It also assists in executing algorithmic strategies, such as the ones we discussed above. Reducing the risk you take considerably helps you with effective risk management.
5. Put your existing knowledge to use
There’s a common misconception that automated trading is something that can operate without any input from humans or that it always turns into profits.
That’s simply not true.
It's only a tool for traders to improve their trading practices.
You still have to input the rules it’ll follow and it's something you need to be thorough in.
If you fail to input any particular, it derails the entire calculation and leads to wrong results. This is to say that your automated trading is as good as you’re with the tool.
Instead of thinking of it as a magic tool that absolves you from putting in any effort, you can truly take your trading to the next level by infusing it with your genuine knowledge of the industry or market of choice.
Now, you don't need to have in-depth knowledge of the market, especially if you're a beginner. But if you’ve a special interest in any market such as gold, silver, and other metals, you can use your knowledge about price swings to program your tools better and make transactions.
6. Manage risk effortlessly
As algorithmic trading helps you make more accurate predictions about the rise and fall of market trends, it steadily leads you to improved risk management.
Not only does it make better predictions, but it also eliminates human error to provide accurate results.
Here’s how algorithmic trading leads to improved risk management:
As you backtest and perfect your strategies before you go live with them, you’re able to turn in better profits from your strategies.
It gives you more room to experiment without the risk of failing. You may test out more strategies and bigger batches of data in a short span of time to cover more ground.
As you gain experience with automated trading, you may venture into newer markets based on your data-driven approach.
You can monitor your trades at all times, minimizing the risk that occurs as a result of different timezones of markets.
Data-driven decision-making makes automated trading the go-to investment tool today
In conclusion, automated trading has proven to be a powerful tool that can provide individuals and institutions with a significant competitive edge in the financial markets.
By utilizing sophisticated algorithms and advanced technology, automated trading systems can swiftly analyze vast amounts of data, identify patterns, and execute trades with speed and precision that surpass human capabilities.
Nevertheless, it’s important to note that automated trading is not a guaranteed path to success.
While it can provide a competitive edge, it requires careful design, rigorous testing, and ongoing monitoring. Market conditions can change rapidly, and strategies that were once successful may become ineffective.
It’s important to approach automated trading with diligence, adapting strategies as needed and staying vigilant to market dynamics. By doing so, you can unlock the full potential of automated trading and gain an edge in today's complex and competitive financial landscape.