The arrival of technology and the digitalisation of trading software made investing in financial markets pretty much adaptive and accommodating to the latest tech trends and innovations.

The popularity of artificial intelligence has found its way to brokerage companies, allowing investors to use bots to execute market orders and make decisions.

But is this automated method the best way to trade? And how reliable are algorithms to generate profits? Let’s explore how this strategy works and its pros and cons.

Exploring Algorithmic Trading

Algo trading entails using programs and software to run investing activities on the trader’s behalf. Automated systems run sophisticated logical equations, utilising machine learning and artificial intelligence to process market information, analyse patterns and make decisions.

These activities happen within seconds, and usually, the decision-making process is faster than human capacity. These trading techniques are offered through execution platforms, such as MetaTrader and cTrader, which adapt their software to accommodate automatic trading.

Benefits & Drawbacks of Algorithmic Trading Strategies

The debate has always been around the fairness of these strategies and how reliable they are in making accurate investments or responding to dynamic market changes. Let’s review some of the advantages and disadvantages.

Pros

Novice traders prefer algorithmic trading because they lack sufficient analytical skill and market experience, while automated systems allow them to benefit from the following.

• Optimising workload by automating some trading sessions and accounts to machines.
• Enabling traders to pay more attention to manually traded leveraged positions or volatile markets and delegate more stable positions to machines.
• Increasing responsiveness because AI can process, analyse and make decisions faster than humans.
• Relying on emotion-void robots to make logical decisions.
• Testing different strategies in a short period of time before engaging in live sessions.
• Increasing interaction time because software can run 24/7 to capitalise on market opportunities during after-hours or unexpected events.

Cons

Despite the numerous advantages of automated techniques, there are some pitfalls and risks that accompany AI trading strategies.

• Inability to read and analyse unprecedented market events, especially since machines rely on learning from historical data.
• Executing wrong market orders due to incorrectly written codes or design flaws in the algorithm, leading to unmanageable losses.
• High exposure to risks and market challenges if the automated system fails or faces downtimes.
• Traders are unable to develop rationale and analytical skills because of overreliance on machines to make investment decisions.
• Any unexpected lags or glitches cause severe damage if orders are executed with delays or newsfeeds face high loading times.

Conclusion

Algorithmic trading is undoubtedly a revolutionary approach to executing market orders and benefitting from smart technology to make returns by investing.

However, artificial intelligence still has a long way to go, especially in the trading realm, where markets move continuously, and unexpected events can happen at any time.

Therefore, auto trading strategies must be carried out with caution, allowing investors to capitalise on the advantages and minimise the associated risks.

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