Such algorithmic trading has surely increased in the previous years. Does this help in improving the market quality and should you encourage this? Well, there are so many of those who say that algo trading does help in improving the liquidity and would also boost the informativeness of the prices and quotes.
A big reason why the algorithmic trading has become really popular is the due to the benefits that such holds over trading in a manual method. What you must know is that there are many benefits that you can get from algo trading like reduced costs, speed and accuracy. Since the algorithms were written in advance and they were executed manually, then the primary advantage is speed. Speed in which the different trades are done is being measured in just fractions of a second which is much faster than what the humans can perceive.
Such algorithm has such benefit of scanning as well as executing on different indicators at a speed and which is far from what human can do. Since trades are analyzed and done in a faster way, then you can have more opportunities and they are being offered at better costs.
Accuracy is also a benefit to algo trading. When the computer is automatically doing a certain trade, then you would be able to avoid such pitfalls of accidentally placing in the wrong trade associated with those human trades. In manual entries, there would be a higher chance of buying such wrong currency pair or that wrong amount unlike the computer algorithm that was double checked to be sure that there is really a correct order that is entered.
A big benefit of such algo trading is that this is can remove human emotion from the markets and the trades are placed in a set of predefined criteria. One great reason why such is really a benefit is the fact that a human trading would be prone to a lot of emotions and this would cause irrational decisions. Also, the two emotions which may cause poor decision but the algo traders are not exposed to are greed and fear.
What is also great about algo trading is such ability to backtest. It can be difficult for the traders to understand the parts of the trading system which actually work and what doesn’t because they are running the system on past data. Through the algo trading, you may run the algorithms according to the past data in order to see if it would have worked previously. Such type of ability would surely give you that big advantage since this permits the user to avoid the flaws of such trading system before running this live.
One excellent benefit that you can have from automated trading is the reduced transaction cost.