Also called automated trading, black-box trading, or algo-trading, algorithmic trading uses algorithms to initiate automatic trades. The trader simply creates a trade criteria — for example, an instruction to buy a certain currency when its 50-day moving average dips below its 200-day moving average or to sell when the reverse happens — and then the computer program makes trades automatically. This process offers multiple advantages for traders, including the following.
Speed — Algorithmic trading buys and sells currencies, stocks, or other investments faster than human traders can on their own. The speed helps you avoid price drops or changes before you make the exchange.
Accurate Trading — When relying on a manual process, there is often a delay between when you notice the trend and initiate the trade, but with algorithmic trading, the trades happen instantly and accurately as directed by the trader.
Reduced Transaction Costs — By saving you time and freeing you up from the burden of constantly monitoring the markets, automated trading tools reduce transaction costs, and using automated software is less expensive than paying a human to handle your trading activities.
Constant Checks on Market Activity — Once you create your trading parameters and goals, the software handles the rest for you. Based on your criteria, the software constantly and continuously monitors the market for you, looking for the right deal. This feat would be impossible for individuals on their own, and it ensures that you never miss the types of trades you want.
Backtesting — As you work to strengthen your trading efforts, you need to examine your trading patterns to see what works and what doesn’t. Algorithmic trading tools make this process easy for you with backtesting that lets you see if the algorithms you are using are leading to optimal profits so you can refine your efforts as needed.
Reduction of Human Errors — Traders often yield to their emotions, and although gut instinct can be a useful guiding force at times, trading based on emotions often leads to disaster. When you rely on algorithms to guide your trades, you reduce the risk of human error based on overly emotional or non-intellectual responses to market conditions.
Making investment decisions can be cumbersome and confusing, and missing trades because you are focused on the rest of your life can be frustrating. With algorithmic trading tools, you can remove many of the stresses of forex trading and enjoy the benefits of speed, accuracy, reduced transaction costs, and more.