High-tech trading has become more prevalent in the financial markets in recent years, as software has become more advanced and easier to use.
High-tech trading includes both automated trading and algorithmic trading, and it’s poised to increase in popularity over the next few years. Despite this trend toward high-tech trading, many people still don’t understand what it actually is, how it works or what its pros and cons are.
Here are five important facts about high-tech trading that all investors should know about before using it or deciding whether to invest in it themselves.
What Is High-Tech Trading?
High-tech trading, also called algorithmic trading, has increased exponentially in recent years and is now responsible for over half of all equity trades.
Although high-tech trading allows institutional traders to make more informed investment decisions, it is important to understand what exactly algorithmic trading is and how it works.
Unlike traditional traders who actually purchase stocks from sellers, algorithmic traders use computers programmed with algorithms to trade stocks on their behalf.
As a result, high-tech traders can execute thousands of trades in a matter of seconds or minutes by using technological innovations that allow them to be more efficient than traditional buyers and sellers.
Algorithmic Trading Is Here To Stay
to send small slices of that order to the market over time. For example, an algorithm might decide to sell 500 shares every 10 seconds using prices that rise in 1-cent increments.
This type of trade is meant to be conducted over an extended period of time, so it’s not likely you’ll see these trades show up on your stock ticker tape. For example, IBM went from $120 down to $92 on an algorithm programmed to harvest losing trades and then sell out positions.
How Do They Beat Humans?
At first glance, high-frequency trading (HFT) might seem like a bit of a mystery.
So how exactly do machines beat humans? For example, HFTs have access to more information because they monitor all activity on major exchanges at once an impossible feat for a human being.
Additionally, algorithms can process market information more quickly than any human trader possibly could. Last but not least, computers are able to make dozens or even hundreds of trades in a single second another advantage over mere mortals who rely on their two hands to type trade orders.
The next time you wonder why humans don’t win against HFTs, these three factors will help you remember that it’s not an even playing field.
What Are The Benefits Of Algo Trading?
Algorithmic trading is good for high-frequency traders because it improves their ability to capture short-term price movements.
The types of strategies they use are programmed into an algorithm that can be executed by a computer, thus allowing them to execute more orders than if they were making trades on a traditional exchange.
Algorithmic trading is also useful in cases where a security’s price is moving too quickly for human traders to profit from arbitrage opportunities.
Algorithms don’t get tired or bored, and they won’t blink at a volatile market environment and lose profits as a result.
If you’re looking to make money in rapidly changing markets with large spreads between bid and ask prices, algorithmic trading offers the potential for significant gains over time.
Is It Right For You?
People are often concerned when they hear about the stock market and trading because it sounds like a complicated process.
However, in reality, once you have learned some basic facts and understand how things work, you can choose a strategy that works for you. The more time you invest into researching and learning what works best for your situation will help you move forward with confidence.
If high-tech trading seems overwhelming to you or if there’s something else that is holding you back from making progress, there are many professionals who can assist in walking you through each step of your journey to success.
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