Algo Trading Myth & Misconception Prevailing in The Market3 min read
October 19: Algo Trading is a hot topic of debate nowadays, isn’t it? Well, if looked upon in literal meaning, the term “Algorithmic Trading” refers to the practice of translating a trading strategy into a computer program or algorithm and then using historical data to determine if the program or algorithm is profitable.
It sounds technical and a lot of work. For a person who has little or incomplete knowledge of Algo Trading, it is indeed a tough nut to crack. But it is also a fact that many misconceptions and myths are prevailing in the market, and that needs to be addressed.
The phrase “algorithmic trading” is frequently confused with other related ideas and vocabularies, such as “high-frequency trading” (HFT), “automated trading,” and “quantitative trading.” Even though these are relatively connected to one another, they are not the same.
Quantitative trading is a form of financial speculation that makes use of sophisticated mathematical and statistical computations in conjunction with quantitative analysis to develop trading strategies. Depending on the plan (and the strategist! ), this can then be carried out either manually or in an automated method.
Automated trading is the practice of automating the whole process of order executions, such as buying or selling, and would frequently have automated portfolio and risk management as well.
Executing orders in an incredibly short period of time, typically in less than one second, and aiming for a minuscule profit from each transaction while engaging in a large number of trades overall are both essential components of high-frequency trading.
Although different people have different ideas and opinions, to make things simpler, we have covered the most common ones.
- Knowing a programming language is required for Algo Trading.
This is not entirely correct. If you are a beginner, there are several predefined Algo trading strategies available. However, be certain that the Algo trading program you’re utilizing is SEBI registered.
2. There is a widespread misconception that Algo Trading produces assured returns.
It is not difficult to find strategies that trade more frequently in order to appear lucrative. However, if the impact and trading expenses are included, the large gains diminish dramatically or completely disappear in virtually all circumstances.
3. Algo Trading can never be as successful as humans.
Many people have the misconception that algorithms cannot “feel” the market, which, although not entirely false, can nevertheless be misleading. Trading styles such as scalping and arbitrage trading, which are difficult or impossible for humans to carry out, may be successfully carried out with the assistance of Algo trading.
4. Trading using algorithms allows you to “Set It and Forget It.”
Although it is true that algorithmic trading does the work to generate profits, saving time from daily trading routines, it is still necessary to exercise some level of supervision over these techniques. For instance, investors should keep an eye out for any kind of code error in all deals.
5. Retail Traders Suffer Losses Due to HFT.
One of the most pervasive misconceptions about algorithmic trading is that HFTs compete with retail traders. In reality, HFTs only compete with other HFTs.
To be able to make the most out of Algo Trading is simply by busting out the myths and misconceptions and gaining maximum knowledge on the topic. Take a step in that direction and explore tons of information awaiting at Alice Blue. Visit their website for more: https://aliceblueonline.com/.
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