Algorithmic Trading: Definition and Overview
- This method helps in leveraging the speed of technology that leads to an excellent output compared to a manual one.
- This method works with both institutional traders and retailers.
- The institutions using this Methodism are investment banks, hedge, pension, and mutual funds.
- The aim of traders is to accelerate the trading speed and the benefits gained from them.
- It has emerged as a smart way of investing that acts as a pool for international trading success.
- These features of algo trading can give a brief overview of this trading method. The scope and advantages of algo trading are expanding.
Algo Trading Apps and Their Benefits
As each algo trader is now using an algo trading app, its scope looks forward to an improvement in the future. Some of the best applications that support algo trading are:
- Meta trader
- DX charts
- Robo trader
The Benefits of Algo Trading Are:
Low Price and Transaction Costs
No human errors
The Facility for Backtesting
Coding Not Mandatory
Slippage in Algo Trading: Why, What, and More?
The financial market is highly volatile and has a lot of issues. Slippage is one such issue and captures the attention of traders. It is an issue that compromises the difference in the execution price of a trade and the requested price. It is a sign of a highly volatile market.
Causes of Slippage
Use of Delayed QuotesIt would help if you didn't use delayed quotes. They pose the risk of slippage. You can keep an eye on the sources providing quotes. This step would help you in having the information about new quotes. It is a considerable risk for your trading, and it's the return on investment.
Trading Amidst High VolatilityYou can't bear the risk of investing in an environment of extreme volatility, can you? You cannot do it because high volatility has no standard output. It can be shallow and high.
Low Volume of TradingA low volume of trading is not a good thing. It would help if you had significant importance to investing and getting returns. It is necessary to avoid the risk of slippage and similar conditions.
Choosing Wrong HoursSince many traders are trading, keeping up with time is extremely important. It would be best if you went for trading in the hours which seem the best for it.
Involvement of the Third PartyThe involvement of a third party in your investment order may be responsible for the deterioration of your return on investment. Having a loyal and trustworthy connection for your deals would be best.
The causes of slippage are a vast domain in itself. It takes a lot to research and accumulate knowledge of such topics. However, current affairs are a great source to be updated with this knowledge.
Effects of Slippage
Differences in the PricesSlippage is the term that describes the difference between expected and output prices. This factor already creates a distinction that may be positive or negative depending on the conditions.
Negative Slippage, Less TakeawayNegative slippage occurs when the actual price for an investor comes out to be lower than expected. It is a clear situation of loss.
Positive Slippage, More TakeawaysIf an investor is fortunate enough to have a positive slippage, they may benefit considerably. The investor can have a substantial positive return.
VolatilityVolatility is widespread in the market and is an impact and the cause of slippage. It is difficult for investors to escape the chances of volatility in the market.
The effects of slippage are widespread. It takes work to know them all at once. However, asking the experts about their functioning in the market is advisable.
Mitigation Strategies for Slippage
It is essential to know about the possible steps to mitigate risks that accelerate the chances of slippage. Here are a few tips that you can use for the same:
Leveraging TechnologyIt would be best if you leveraged technology. It would allow you to avoid the chances of slippage.
Avoiding Volatile MarketsInvesting in a volatile market would lead to astonishing results. You would either return with huge benefits or huge drops.
Boundary OrderYou can allow your price to be higher than the current rate of the market. If the conditions support you, you can open a new trade.
Stop and Limit OrdersPlease specify the price at which you would receive the brokerage. This step would allow you to have control over your orders.
Trading is an ancient profession. It underwent numerous changes. Algo trading is one of the most famous methods of trading. It uses technology to operate and maximize profits. However, it is subject to many problems like slippage.