Trading has always been fast because finance never really sleeps. Sure the market closes at certain times, and there are other rules and regulations that you need to adhere too. But it has always been fast.
With the rapid rise and implementation of algorithmic trading, or automated trading, it is moving a rate that would feel utterly breakneck to the first trading companies all the way back when.
“Reaching any goal in trading requires specific domain knowledge and technical skills. But then, after that, it’s all mindset management. Yet most people ignore that —they automatically think they have that last part all figured out, and it’s a mistake.”
― Yvan Byeajee, Paradigm Shift: How to cultivate equanimity in the face of market uncertainty
Technology has given traders so much more power. Not only does the trade happen at a faster rate, but they are more research-based. Where traditional traders are following the technical charting for all of their trading calls. An algo trader won’t take the same route. They want more.
Every hour there are trades being input into computers that are running algo programs. They will execute them in small packets. One of the most significant advantages here is that they have the capability to spot arbitrage opportunities between prices in nanoseconds. So they can make trades before a human trade could blink and process the opportunities. In comparison, a financial institution used to take big trades on its books, but have a huge amount of traders executing deals in smaller chunks – without moving the market.
But the algos don’t just use numbers to make these decisions. Using specially created programs, they scan agency reports and news. They will be looking for keywords that might be related to interest rates, for example. From that information, it will look at how it has behaved in the past and will move forward with action based on that information.
Not only that, but algos will analyze each quote and trade on the stock market. They will be able to identify liquidity opportunities and turn that information into smart trading decisions.
This is where the back-testing, parameters, and pre-defined levels come into play.
Typically a trader who is using this software will have a range of goals that they would like to meet, as well as a trading plan. Those will be the guides when programming the software to make trades.
Some industry reports have stated that they expect to see growth from $11.1 billion in 2019 to a huge $18.8 billion by 2024. Algo trading is almost a fully automated system, but humans play a key part in working with the software to set the right levels. Algorithmic trading has pulled trading into modern times and will keep moving it forward. Using historical data and being able to analyze an enormous amount more every second means that traders get better results and much faster. It also takes away some of the human elements that may stop a trader from moving forward with a trade.
The future of trading is here, and it’s exciting.
