Automated Algorithms or algorithmic trading can be said to be a system that allows traders to establish specific rules for both trade entries and exits, upon being programmed and is normally performed automatically via computer. The entry and exit management rules can be simple instructions as moving average crossover. However, these instructions can sometimes be a little more complicated as it requires a complete understanding of the relevant programming language specific to that trading platform. Normally, these algorithms are applied in online trading like forex and cryptocurrency.
How they work
Some trading platforms allow traders to choose from a list of most common technical indicators to create rules that can then be traded autonomically. Furthermore, the user can exploit the default options for input on the trading platform or choose to input a certain order to be placed when the next trade is activated. In most cases, however, experienced traders prefer to program their own strategies and custom indicators to suit their trading ideas. Sometimes they would prefer to work with experienced programmers to help them design suitable trading strategies and indicators.
Once these rules have been developed, the computer will, on behalf of the trader, identify and locate trading points based on the strategies place the trade. As soon as the trade has been placed, trailing stops, as well as profit targets, will be placed based on set rules. In cryptocurrency, however, these algorithms are known as bots. These are software programs that are fashioned to communicate and execute trades on behalf of the crypto trader.
For instance, an arbitrage trading bot is only programmed to identify disparities in terms of pricing; say traders are selling an item at $50 on a given exchange while paying $3 higher on another exchange, the bot will leverage the temporary spread. Some of the widely used bots include inter-exchange arbitrage bots preferred by traders who execute multiple trade exchanges; flash crash bots which normally leverage a temporary crash in an exchange; and basic trade bots which can be designed to any set strategies.
Impact of Automated Trading on Traders and Online Trading
One of the most significant impacts automated trading has on traders is that it relieves them of unnecessary emotions and irrationality they would have experienced were they executing trades themselves. Moreover, this system executes trades at high speed thereby ensuring that traders do not miss out on the opportunity. Humans are very slow but bots are very fast.
With these algorithms, there are very low data entry errors that can be experienced as opposed to when a trader was entering the values themselves. Furthermore, this system can be programmed to trade 24/7 without brakes, something that a human trader cannot achieve. This round-the-clock trading enables the trader to seize opportunities even in his absence.
Algorithmic strategies have also tremendously impacted on the movement of both individual and market stocks through its convenience and reliability. Furthermore, through these algorithms, online trading has been made easy that even the newbies can trade and generate profits having a comprehensive understanding of the trade dynamics.