Such algorithmic trading has surely increased in the previous years. Such would help to improve the market quality and is it best to encourage this? Well, there are so many of those who say that algo trading does help in improving the liquidity and would also boost the informativeness of the 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 advantages of algo trading are actually related to speed, accuracy and also minimized costs. Since the algorithms were written in advance and they were executed manually, then the primary advantage is speed. The speed in which such trades are made is measured in only fractions of a second that is a lot faster than what humans are able to 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.
What you can also get from algo trading is accuracy. 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.
A big benefit of such algo trading is that this is can remove human emotion from the markets and the trades are placed in a set of predefined criteria. The reason why such is an advantage is because those humans trading are susceptible to such emotions which may lead to irrational decisions. Such two emotions which lead to poor decision which algo traders are not susceptible to are greed and fear.
Being able to backtest is also a benefit from algo trading. 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.