Trading stocks is not for the faint of heart; in fact, a person must know themselves thoroughly to before entering a platform that requires a person to be able to handle the pressure of performing well and have the discipline to stay the course with a trading strategy that may have few high and low points. Once a person decides they are built to trade stocks, they must have the money to sustain trading. Many experts recommend starting with a minimum of $100,000. With the use of an algorithm to assist the trading of stocks, there will be other requirements such as being great at collecting and analyzing data. It will highly important to understand how to program a computer or instruct the computer via an algorithm to execute trades based on the trading strategy coded into the algorithm. There is only 30 percent of stock market volume not being traded with the use of an algorithm. Individuals and large institutions are utilizing algorithms to trade most of the volume of that occur daily. For individuals, there are more than a few strategies that are utilized in algo trading, another name of trading stocks with the use of an algorithm. It is also important to know the advantages and disadvantages of using an algorithm to execute stock trades.
Advantages and Risks Utilizing an Algorithm in The Stock Market
Emotions can run high in a stressful situation, and trading stocks can be stressful. Discipline is also required. By using any algorithmic trading strategies, the executing of a trading strategy will not be driven by emotion. The algorithm will execute the trade each time the criteria is met. The use of algo trading will be instant discipline, and it will stick to a trading strategy. The algorithm makes faster calculations and more trades at one time than a human being. Those are some of the advantages gained by using an algorithm, but there are some risks to using an algorithm and they are:
• Complexity risks can create problems
• Risks created by transactions
• Unexpected can cause risk
The risk associated with the complexity of the algorithm happens when the trading strategy coded into the algorithm is complex, but the market would eventually produce signals that would exploit the complexity of the algorithm. The algorithm has covered a lot, but the market will deliver signals the algorithm was not designed to catch. A method to handle complexity risk is to simplify strategies used in the algorithm. Everything will not be exploited for gains by an algorithm. When an algorithm is designed to take advantage of a market trend by making several transactions, it could accumulate commission or fees along with human error can occur to cause trade to fail. An algorithm should get in or get out of trades as quickly as possible. An algorithm should keep the size of a trade manageable. Back testing of trade may never prepare an algorithm for an event that it was unexpected. An unexpected risk can wipe away results, but countermeasures should be in place to reduce other types of risks and minimize the damage of unexpected risks.
Prevent Flash Crash From Happening
The Flash Crash is a detrimental event that occurs when stock orders are withdrawn, and price decline is amplified by the withdrawals that occur. several times in the history of trading and was caused by an algorithm. Most major stock exchanges have increased security measures to reduce the chances of flash crash. The event is not totally unavoidable. There is always a chance of an occurrence because algo trading is here to stay and will continue to execute trades.