Updated: Aug 16, 2022
Algorithmic, systematic, or quantitative Trading is a method by which trading strategies are built with a set of specific instructions that have definitions for time, instrument, price, quantity, order type, pattern, etc. These set of instructions are programmed in a computer language to be carried out in the financial market place.
There is nothing new about algo trading, as it's been here for a long time, done by Prop Firms, Hedge Funds, Big Investment Banks, due to their available resources in terms of IT personal and capital. Usually they build their own software engines and trading platforms. In fact today more than 75% of shares/contracts traded on US Exchanges come from algo trading.
Algo trading does not have to be high frequency trading, nor is it restricted to wall street big banks anymore. The advancement in software, increase in computational power are happening at an exponential rate, couple that with huge price drop and you have an atmosphere where everyone can develop and deploy multiple systematic trading strategies that automatically trade the market with total risk control.
The advantages to switch to algorithmic trading are many:
Minimal Emotional Interference: Because all the development and stress testing are done beforehand, there are no emotions attached to the decision making and pulling the trigger, as all decisions are predefined ahead of time.
Speed & Accuracy: Computers are much faster at analyzing and executing orders, which in turn provide better order fills. Also computers don't make the mistake of filling 10,000 shares instead 1,000 shares (assuming they are programmed correctly) specially when markets are moving quickly.
Build Confidence & Discipline: Since all systems are developed and backtested ahead of time, the trader understand the behavior of the system and have a historical statistics as a guideline, which gives the trader confidence when the system in the inevitable drawdown. Discipline is easier to maintain when you know how your system will behave in any market condition.
Diversification: Algo's can be combined in portfolios that trades multiple instruments, on multiple timeframes, using multiple logics. All this can be automated with portfolio risk control, that is impossible for a human to execute in real time. Trading a portfolio with multiple instruments/timeframes/logics is the holly grail of diversification, and it is only achievable with algorithmic trading.
Of course like all computer systems, you need to take care of your hardware/software with security, backups as failures do happen. Today, Software packages lets you build systems in seconds, so you will need to learn how to develop robust trading strategies without curve fitting, how to stress test any system to find out where it brakes down, how to build portfolios to minimize drawdowns, etc. The learning curve is not easy, but it is not impossible.
If you want to learn how to achieve the holy grail portfolio, then check my Algo Trading Master Class, for building robust trading systems without any programming knowledge or previous experience, by using proven building blocks and state of the art software to test and verify every step.