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What Is Algorithmic Trading?
AI algorithms are presenting a new way to trade the markets
Published February 22, 2024.
Algorithmic trading is becoming more prevalent as investors explore different options for managing and optimizing their trading accounts. As the complexities of the market increase, traders are looking for new ways to take advantage of new potential possibilities while reducing some potential risks.
Note: Fortrade offers the ability to trade the price changes of instruments with CFDs and NOT to buy/sell ownership of the instrument itself.
What Is Algorithmic Trading?
Algorithmic trading is an automated approach that involves using advanced software and mathematical models to analyse financial markets and identify possibilities. These algorithms are coded to recognize certain patterns in the market data, such as price movement, volume, momentum, and other metrics. Then, they execute trades at specific times according to predetermined rules based on these patterns.
This trading strategy enables advanced investors and beginners to optimize their trading account performance while considering various factors, including market conditions, news events, risk management guidelines, etc.
» Learn more: More details about algorithmic trading
Why Do People Use Algorithmic Trading?
- Informed decision-making Algorithms analyze real-time data according to set parameters. This helps traders make more calculated decisions based on accurate and reliable data.
- No emotional bias This approach eliminates the possibility of human emotion affecting trading decisions.
- Access to market inefficiencies Computers can identify trends that might not be visible to humans, specifically due to the sheer amount of data available.
- Enhanced execution and risk management Algorithms can help traders quickly open and close positions and manage risk more effectively.
» Find out more about trading with Fortrade.
Potential Risks of Algorithmic Trading
- Technological requirements and costs You'll need a server with high-speed internet, powerful computers, trading software for complex calculations, and investments in backtesting software and data.
- Inaccurate or incomplete data Typically, algorithmic trading primarily relies on data, and if there are any inaccuracies or gaps, it could lead to wrong decisions.
- Potential volatility changes Algorithmic trading is a fast-paced process, which can result in high levels of volatility and sharp price movements.
- A need for continuous monitoring and adjustments Algorithms require regular updates to stay ahead of changing market conditions and can be difficult to monitor, especially if you’re not tech-savvy.
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