Why Automated Trading Is Becoming The Norm For New Investors
In the financial markets of the United States, 70 to 80% of trades are executed via automated trading.
In emerging markets such as India, the algorithmic trading volume hovers around 40%.
What does this tell us?
Automated trading is gaining traction among new and seasoned investors.
We’re going to examine the reasons why below, but before we do, let us first understand what automated trading is.
What is automated trading?
Online trading provider IG.com defines automated trading as:
“…the use of algorithms to make trade orders.”
You may also come across the term algorithmic trading instead of automated trading. The two expressions are synonymous and can be used interchangeably.
Now, why is algorithmic trading preferred by new investors?
Advantages of automated trading
In a nutshell here are the top three reasons automated trading is such a hit with new investors.
1. Eliminates emotion
One of the biggest hurdles rookie investors have to surmount is learning to remove emotion from their trading.
An automated platform that’s guided by pre-determined rules, therefore, presents itself as an ideal solution.
Such an algorithm relying solely on market information can objectively assess market conditions and place trades accordingly.
2. Trading is done 24/7
Amateur investors may not always have the time to study the markets before making trades and consequently might miss out on good opportunities.
With an automated trading platform, however, trades can be made at any time so long as the programmed settings are met.
This means new investors are strategically positioned to benefit from changing market conditions day and night.
3. Mitigates market impact
If a trader wishes to purchase a particular asset in bulk, it’s not wise to do so in one trade as this can potentially affect the overall market price.
Therefore, smaller trades are recommended in which the trader stops to check whether the asset price hasn’t gone up, if it hasn’t, they can continue with their purchase.
However, this manual process is all very laborious indeed.
Thankfully, with automated trading, a new investor can simply set the algorithm to purchase required stock in bulk. And after each purchase automatically verify that the price is still stable before continuing.
The disadvantage of algorithmic trading
While automated trading does provide a great way for new investors to gain access to the financial markets, it is not without its limitations. One of which is:
1. Missing key trades
What does this mean? It is almost impossible to input all the variable rules that capture every market nuance.
By virtue of this, the trading algorithm is going to invariably miss out on potentially lucrative trades.
While this can be mitigated with the addition of more indicators, there is a high probability that the algorithm may never be able to comprehensively identify every trade the investor wants.
Automated trading platform examples
Perhaps you’re new to the trading game and would now like to get your feet wet by diving into the actual markets and need some automated trading platforms.
Among the leading third-party platforms are MetaTrader 4, AlgoTrader, as well as ProReal Time’s ProOrder.
It’s clear to see that technology is revolutionizing investing. Read more about this in my blog the Rise of Robo-Advisors in Wealth Management.