What is Algorithmic/Automated trading?

algoscreen

I still remember when I was a small boy back in the 1980s, my dad would buy and sell shares (stocks) by calling up his remisier and place orders through the phone. When 1990s came along, online trading started becoming popular as orders placed online were cheaper than placed through the phone.

Before long, 2000s came along and fundamental analysis as well as technical analysis were the two main camps which traders differentiate themselves in the world of trading. We also saw the mass adoption of forex trading in the retail space. By 2010, it was not uncommon to find a handful of your friends trading forex with their own money.

2010s was when I started dabbling into algorithmic trading (2011 to be exact). I was still working for an international broker then, and was pretty much a manual forex trader, trading my own accounts after work. The hot seminar topics which saw the most attendees then was about how to create your own trading strategies, complete with entry/exit/stop loss rules, and how using a trading journal could help you become a more disciplined trader.

I was thinking to myself, if only I could somehow create a computer program to execute these entry and exit rules mechanically, with minimal intervention. This would eliminate the human errors that I would occasionally make, and I could also run it to trade automatically during office hours instead of just trading during the evenings! Heck, it would even free up my evenings to do other stuff!

And Hence My Algo Trading Journey Started…


Let’s go through the generic definition first.

An Algorithm:

 

"The process or set of rules to be followed in calculations or other 
problem-solving operations, especially by a computer."

Thus,

Algorithmic Trading (commonly known as Automated Trading or Black-Box Trading) is:

 

 

"The process of using a computer programmed to follow a defined set of instructions for opening and 
closing trades in order to generate profits according to a 
trading strategy as devised by the human trader."

 

Note that the keywords here are “trading strategy” as “devised” by the human trader. The computer program can only mechanically implement the trading strategy exactly as instructed, without emotions and without further thought. If the trading strategy is a loss-making strategy, it will only serve to lose money for the trader faster and more consistently (the irony!)

Thus, trading using algorithms (or simply “algos”) is nothing magical, and certainly does not turn a loss-making strategy into a profitable one. However, if the trading strategy is a profitable strategy, it can execute exactly as instructed, void of “Greed” and “Fear” which plagues all human traders (note that I used the word “all” and not “most”).
It does so reliably and consistently, 24/7 round the clock, with no rest needed.

Why Doesn’t Everyone Trade Using Algorithms Then?

In fact, I ask myself this exact same question from time to time too. Through my countless algo trading seminars over the years, I noticed that the following are the key concerns most people have:

  • “Are trading using computer algorithms safe?”
  • “I do not know how to write computer programs, hence algo trading is out for me”
  • “I’m sure I can make more profits in trading than a computer program!”

This reminds me of the time when I started learning about computers at the age of 14. It was an IPC 386 computer which costed a bomb, and I am still grateful for my parents who scrimped and saved to buy me that. At that time, the message going around educating the adults was this: “Computers will not explode unexpectedly”, “Computers can help you do your mundane tasks faster and easier”, Computers can do wonderful stuff like printing party banners (dot matrix printers!) and birthday cards easily!”

Sounds familiar? Aren’t these the same messages that we’re trying to say here?

Check out the rest of our articles on algorithmic trading here:
How to differentiate good trading systems from the rest?
Ways you can manage your risk using automated trading strategies

Do also check out our preferred broker IG (click here). Listed on London Exchange, they are among the largest forex and CFD brokers worldwide. We are currently running our algorithmic trading systems on IG live accounts, performance can be seen here: myfxbook – GS Alpha Bundle Portfolio

 

This article was sponsored by IG, the world’s No.1 CFD provider (by revenue excluding FX, 2016). All views, opinions and recommendations expressed in the article are the independent opinion of Guiding Star Technologies and do not in any way reflect the views, opinions, endorsements or recommendations, of IG Asia Pte Ltd (Co. Reg. No. 20051002K) (“IG”). Information is for educational purposes only and does not constitute any form of investment advice nor an offer or solicitation to invest in any financial instrument. No responsibility is accepted by IG for any loss or damage arising in any way (including due to negligence) from anyone acting or refraining from acting as a result of this information or material.

Leave a comment