If you ever have wanted to have a computer that takes care of the trade execution for you, you have probably looked into algorithmic trading. Being used by many big trading firms, as well as retail traders, algorithmic trading is becoming the choice of more and more traders, as the benefits start to dawn on them. Still, with the Internet being awash with trading bots that seem to make more harm than good, it certainly is relevant to ask if algorithmic trading really is profitable! So, is it?
Yes! Algorithmic trading is profitable, provided that you get a couple of things right. These things include proper back testing and validation methods, as well as correct risk management techniques.
Unfortunately, many never get this completely right, and therefore end up losing money. Due to this, you may have seen many make the claim that algorithmic trading doesn’t work, which in reality only has got to do with them using the wrong methods.
With that said, in this article you’ll discover the following things:
- How algorithmic trading differs from other trading styles
- The top 5 reasons why we believe that algo trading can be even MORE profitable than discretionary trading
So let’s now start off by looking at what algorithmic trading really is. Many people have got this wrong from the beginning.
Is Algorithmic Trading Really a Trading Style?
When we typically speak of different trading styles, we tend to divide them into different categories. One common categorization is:
- swing trading
- Day Trading
- Position trading
- Algorithmic trading
Now, the three first on the list refer to trading styles that are distinctly different from one another. The perhaps biggest difference is the length of the holding period, which differs greatly between the different trading styles. For instance, swing traders hold their positions from a few days up to a few weeks, while day traders close all positions by the end of the trading day. In addition, they usually rely on different core logics for the strategies themselves.
Now, algorithmic trading is not a trading style on its own, in the sense that the holding period and trading strategies differ from those of swing trading, day trading, or position trading. Instead, algorithmic trading is the way in which we construct and execute our trading strategies.
With this in mind, algorithmic trading isn’t confined to one single trading style. We ourselves trade all sorts of strategies, ranging from day trading to position trading strategies, all at the same time!
This is a major benefit, since you may combine trading strategies for better returns and less risk.
With this said, let’s look closer at some reasons why algorithmic trading indeed tends to be more profitable than discretionary trading!
5 Reasons Why Algorithmic Trading Is More Profitable Than Discretionary Trading
Here follow 5 reasons why we believe Algorithmic Trading on Autopilot is not only is more profitable than discretionary trading but also is the better choice overall!
1.Everything is back tested!
As an algo trader, you don’t guess anymore. Instead, you rely on historical back tests to evaluate the performance of trading strategies, to maximize the chances that they will continue to work well into the future.
Below you see a back test report for one of the trading strategies we trade at the moment.
This is a major benefit when compared to the average discretionary trader, who usually relies on guesses about how certain patterns should perform. With this in mind, it doesn’t come as a surprise that most discretionary traders lose money…
2. All strategies are executed by a computer
Trading several trading styles at the same time would have been nearly impossible, hadn’t it been for the fact that the computer takes care of it for you! And in addition to being a convenient solution, it comes with quite some heavy advantages.
The perhaps biggest advantage is the fact that you avoid many of the mistakes that are so common among discretionary traders. For instance, lack of focus resulting in erroneous orders or other mistakes won’t be that big of an issue anymore.
Of course, there will be hiccups, and there will be instances when the computer still manages to mess things up. However, with some monitoring, this will just be a minor concern. Especially considering that it generally runs very reliably.
To provide an example, I’ve had my trading strategies running for two weeks now without a single issue, although quite a lot of orders have been placed!
3. You’re not as emotionally affected
The psychological and emotional part of trading is one of the most challenging aspects of any trading style. It’s not uncommon to see discretionary traders struggle with placing the next trade and adhere to their set rules, as they run into a drawdown which still is within the expected levels.
Since algorithmic traders aren’t involved in the execution of their trading strategies, this issue is much less common to have.
Still, it’s worth mentioning that algorithmic trading by no means relieves you of all emotional pressures and hardships. It just makes it a lot easier!
4. You can diversify across strategies, markets, and timeframes
Again, with the computer taking care of the orders for you, you can expand your trading into more markets, timeframes, and strategies, allowing for superior risk management and profit potential.
For instance, you may have algo strategies trading gold, crude oil, market indexes, or stocks, all at the same time. Then if one or two of these markets behave strangely at one time, it’s very likely that another will make up for those losses.
We ourselves may trade as many as 100 strategies at the same time, meaning that each strategy only risks a small portion of the capital. At least to us, this feels much safer!
5. The computer never sleeps
Our algo trading strategies run as long as the markets are open. This is a great advantage, particularly for some markets like gold, where there are multiple sessions around the world.
You may even have strategies that trade varying session hours in the same market, to take advantage of how the market behavior changes throughout the session. This is especially true for global commodities (again, like gold) that may behave very differently depending on what part of the world currently is trading it actively.
Algorithmic trading isn’t just profitable, but also increases your chances of becoming a profitable trader. This has to do with the fact that all strategies you trade have been validated on historical data, as well as with the superior order execution that’s offered by a trading computer.