Today’s 21st century is a haven of technological developments. The dynamic nature of the century is developing by every minute, where technologies like Machine learning, robotics, and artificial intelligence have become common. These are applied to engineering and development and are also an integral part of trading in the financial market.
There are two forms of stock market trading: manual and algorithmic. Algo trading is an automated system that helps people gain the right perspective in the financial market. When we talk of forex trading, tons of robots claim they can turn small accounts into huge ones overnight.
Manual trading is an old-school system where traders and investors study market analysis and make decisions based on their observations. Manual traders do not use computer algorithms to make decisions about investments.
Manual trading advantages
- Traders can take into account the sudden changes in the market, especially caused due to natural phenomena, like the hurricane in Japan, which drastically changes the whereabouts of the global financial market.
- Traders can make instant decisions based on their observations and retract when the market is unreasonably volatile.
- Manual traders can decide whether they have enough profit and check if the market is still in their favor.
Manual trading limitations
As mentioned above, this form of trading is based on human analysis and decision-making. Hence, there exist a ton of limitations for the trader, which include the following:
- Emotional influence
- Limited analysis
- Limited scalability
In contrast to manual trading, algo trading is a newly-discovered form of trading that involves computerized programs with a defined set to make trading decisions. They use automized and pre-programmed factors to study the market trends and attempt leverages like speed and precision.
Algo trading advantages
- It uses robots to trade for you; hence the precision and accuracy of the trade it top-notch when programmed correctly. However, the willingness to stick to the plan, despite the volatility of the market, is one of the greatest challenges of this form of trading.
- When traders stick to the strategy of algorithmic trading, they are defined to be much more profitable when compared to an average trader.
- Robots are at the center of algorithmic trading, providing a disciplined way to execute a trade. Thus, it prevents humans from undergoing psychological changes with respect to market trends, like greed, overconfidence, etc.
Algo trading limitations
Despite providing the advantages mentioned above, this system too has certain limitations, like:
- Extreme dependency on data
- Vulnerability to hacking
- Regulatory challenges
- Complex design and implementations
- Lack of human institution
- Limited scope for development