In the past years, the algorithmic trading has definitely increased. This helps in improving such market quality and should this be encouraged? There are many of those who say that algo trading would help to improve the liquidity as well as it boosts the informativeness of such prices and quotes.
A big reason why the algorithmic trading has become really popular is the due to the benefits that such holds over trading in a manual method. What you must know is that there are many benefits that you can get from algo trading like reduced costs, speed and accuracy. Since the algorithms were written in advance and they were executed manually, then the primary advantage is speed. Speed in which the different trades are done is being measured in just fractions of a second which is much faster than what the humans can perceive.
The algorithm actually has the benefit of scanning and executing on various indicators at a speed which no human has done. Since trades are analyzed and done in a faster way, then you can have more opportunities and they are being offered at better costs.
Also, a benefit to such algo trading is accuracy. If the computer is robotically executing a particular trade, then you could avoid the drawbacks of accidentally putting in the wrong trade which is associated with such human trades. With the manual entries, it is more likely that you would buy the wrong currency pair or that wrong amount unlike the computer algorithm that has been double checked to make sure that a correct order is being entered.
One of the largest benefits of algo trading is such ability to remove human emotion from those markets, trades which are constrained in a set of predefined criteria. A reason why this is one advantage is due to the reason that the human trading is prone to emotions that can result to irrational decisions. Also, the two emotions which may cause poor decision but the algo traders are not exposed to are greed and fear.
What you can also get from algo trading is that chance to back test. It can be hard for such traders to know the parts of the trading system that work and what doesn’t work since they can’t run their system on past data. Through the algo trading, you may run the algorithms according to the past data in order to see if it would have worked previously. Such ability gives a big advantage since it lets the user remove any flaws of the trading system before running this live.
One excellent benefit that you can have from automated trading is the reduced transaction cost.