What is algorithmic trading?

With the development of online trading platforms, it has become possible for everyone to speculate in real time on the financial markets and take positions on buying or selling different assets such as Forex currency pairs or stock market assets such as shares or indices using CFDs. However there are two ways of trading online. The first is manual trading which consists of implementing your own strategies; the second is called ‘algorithmic trading’ and consists of a method of automatic trading. It is the latter method that we shall look at here in this article.

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What is algorithmic trading?
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What is algorithmic trading?

Algorithmic trading is also called ‘automatic trading’, or ‘high frequency trading’, and uses a calculation system based on an algorithm, hence its name. It is therefore software that determines the positions to take, as well as the direction of the trend, the volume to trade and also the strategy to implement.

Algorithmic trading therefore offers certain advantages:

  • Firstly, algorithmic trading enables beginner traders that have no training or experience in the trading sector, to make significant profits fairly rapidly.
  • Also, automatic trading enables your presence on the markets every single day, 24 hours a day, something that a human being simply cannot do.
  • Finally, algorithmic trading follows a strict strategy based uniquely on the technical analysis of the markets and it is not influenced by stress or emotion that may lead to errors.

 

How does algorithmic trading work?

Algorithmic trading can be used alone or together with human analysis of a market situation.  In fact, is used alone, it constitutes an automatic trading software as it is this that places orders for you according to signals detected. However, used with fundamental analysis it only provides support for a global analysis when making decisions by favouring a particular strategy.

The parameters used by the algorithms concerned are numerous and difficult to analyse in detail. Of course, these algorithms take into account the current rate of an asset as well as its historical price in order to determine the different possible movement scenarios.

It is also based on the volume of sales and purchases and therefore uses volatility data to predict the most opportune moments for taking position. Also, the algorithm integrates the technical support and resistance levels into its calculations to create an advanced market analysis.

Using the detected signals, it can then place orders and manage positions in an automated manner or supply indicators to assist the trader in making decisions.

 

The disadvantages of algorithmic trading:

However, algorithmic trading does not unfortunately offer only advantages; there are also major disadvantages such as the following:

  • The first disadvantage of automatic trading is that its strategy does not take into account the emotions of the investors and the movements and trends, or even major events that may occur.
  • The majority of algorithmic trading software requires a personalisation that itself requires certain technical IT skills. There are certain ‘turnkey’ software solutions in existence but these are generally payable and fairly expensive.
  • Finally, algorithmic trading does not currently exhibit any particularly spectacular results, particularly for those who do not invest a substantial capital amount.

 

An alternative to algorithmic trading:

An alternative to algorithmic trading consists of simply copying the positions of human traders that regularly show high performance. This is what is offered by social trading, tested on trading platforms such as eToro, and proved to show truly remarkable results without any surcharge.

With social trading, you will actually benefit from the experience of seasoned traders and your trading account will be managed automatically, following their positions.

 

How to use algorithmic trading on the Forex:

The use of algorithmic trading on the Forex luckily requires no specific technical knowledge which is in fact one of its particularities and its main advantage. You simply need to find a broker who offers an integrated automatic trading tool to benefit by it.

When subscribing to this option, it is therefore the mathematical algorithm that you have or have not personalised, that will be responsible for trading on the market in your place.

Social trading, better than algorithmic trading:

Learn about an alternative to algorithmic trading with social trading as offered by the broker eToro. Your positions will be taken automatically by following those of the best traders on the platform.

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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 65% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.