In the past years, the algorithmic trading has definitely increased. Does this help in improving the market quality and should you encourage this? 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. The benefits of such algo trading are related to accuracy, speed and also reduced costs. Due to the reason that such algorithms were written in advance and done manually, then the main benefit 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.
Accuracy is also a benefit to algo trading. When a computer can execute a trade automatically, then you will be able to prevent the pitfalls of putting the wrong trade accidentally which is common in 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.
What is a big benefit to this kind of trading system is that this has the ability to get rid of human emotion from such markets and the trades are actually constrained in that set of predefined criteria. One great reason why such is really a benefit is the fact that a human trading would be prone to a lot of emotions and this would cause irrational decisions. Such two emotions which lead to poor decision which algo traders are not susceptible to are greed and fear.
What is also great about algo trading is such ability to backtest. It can be difficult for the traders to understand the parts of the trading system which actually work and what doesn’t because they are running the 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 type of ability would surely give you that big advantage since this permits the user to avoid the flaws of such trading system before running this live.
One excellent benefit that you can have from automated trading is the reduced transaction cost.