Algorithmic trading involves the use of computer algorithms to initiate trades and has grown dramatically since 2003, such that nearly 80-90% of futures trading for S&P500, gold and oil is by algorithms. This process is quite different from the traditional method of manual trading. By relying on computational power, you enjoy distinct advantages that could boost your investments and profits. These seven key benefits of algorithmic futures trading make the investment of time and resources worthwhile.
Faster Trading Speed
Algorithms immediately respond when trading criteria are met. This means that when the market conditions change, the algorithm can trigger the selling or purchasing of an investment. One second can make a big difference in trading. This is particularly true with futures oil or futures NASDAQ, where price movements can be very volatile. Getting in on a deal at the right time could impact the profitability of your investment, and getting out at the right time helps you hedge your losses. Algorithms can also be set with protective stop losses and profit targets. They respond to those numbers before a person could have a chance to enter a manual trade. For indices such as the emini S&P 500, algorithmic trading elevates market efficiency.
Humans make mistakes. A tired trader might accidentally enter a position to buy 100 shares instead of selling. It’s also possible that a person could enter to sell 1,000 shares instead of 10,000 shares. These types of mistakes could cost a lot of money. Even if a person makes a series of small mistakes, those errors still add up, eating into profits or causing unforeseen losses. Algorithms, on the other hand, do not make errors. They trigger a sale or a trade of a specific number of shares in accordance with how they were programmed. This can be most beneficial to futures markets that have thin volume, such as futures gasoline.
Removal of Human Emotion
Human behavior is often rooted in emotion. An algorithm’s actions have no emotion taken into account. When certain conditions are met, the algorithm is activated. This means that you will not incur losses or forego profits because of an emotional decision. Algorithms will not hesitate to make the trade, and they don’t really have to think about it. They allow you to avoid over-trading and missed opportunities that come from strong emotions. Another advantage of algorithm-based trading is that you can take a step back from the process and breathe. If you need to take a long lunch break or a morning off, you can do it without missing out on a potential opportunity. By being able to relax, you can have a more positive investing experience. This is particularly applicable to slow moving futures indices such as futures bonds, wheat and natural gas.
Back Testing for Honing Algorithms
Forward trading is not the only function that algorithms allow you to perform. They also facilitate back testing. Back testing refers to applying historical data to your current algorithms. You can test the algorithms on past market data in order to see if you would end up with the same results. This process allows you to hone the algorithms. Use your precise set of rules along with a set of historical data and see if you would make money on the deal. With the results, you can fine-tune your plans. You can do all of this back testing without putting any actual money at risk.
Discipline is essential in a volatile market. You create a plan, and the algorithm executes it. This takes the emotion and hesitation out of the decision-making process. The plan you already created is maintained without question. As market conditions change, the algorithm responds as you planned for it to. By trading on logic instead of emotion or irrational thinking, you can take some of the stress out of investing. Relying on algorithmic trading helps you avoid the highs that come with several successes in a row that might trigger you to make a risky decision outside of your predetermined plan. It also helps you avoid the lows that come from several losses in a row that might result in your skipping the next big trade if you were trading manually.
Algorithmic trading facilitates diversification. One set of algorithms can be set up to trade on multiple accounts and with different strategies. This aids with the mitigation of risk. Diversification of trading also creates a hedge against losses.
Experience the above benefits and accomplishments, with more to come. Try your hand at automated trading with Targets Trading Pro and take the human element out of the trading process today! Daily videos are posted and can be viewed to see final algorithmic P/L for emini S&P, NASDAQ, gold, oil and Dow taken that day.
U.S. Government Required Disclaimer –Futures and options trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don’t trade with money you can’t afford to lose. This website is neither a solicitation nor an offer to Buy/Sell futures or options. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this website. The past performance of any trading system or methodology is not necessarily indicative of future results.
CFTC RULE 4.41 – HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY, SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.
At no time is any of the stated performance an endorsement of or a suggestion to trade. I am a trader and an educator desiring to show proof positive of trading efforts in real time. I am not a broker-dealer, nor am I a financial advisor. My trades are not to be considered an endorsement or recommendation for anyone else to trade live accounts nor do trades on my part denote or indicate that trade conditions or trade expectations are more favorable.