Many eyebrows were raised when the financial markets transitioned from traditional floor trading to electronic trading. Back then people didn’t trust computers to handle their hard-earned money. But today electronic trading has become a convention!
The same is the case with Algorithmic Trading, people find it challenging to adapt, and they are still skeptical that a computer program can buy and sell stocks for them without any manual intervention.
The biggest question that comes into the mind of everyone is “How safe is Algo Trading?” And it is quite obvious as our mind is designed to resist any change.
In this post, we’ve tried to answer this million-dollar question so that traders can make a sound decision before getting into Algo trading.
Should you bother about Safety?
Of course, you should. In this electronic age, people fall trap of internet scams quite easily, and there are so many out there. And since trading involves putting your hard-earned money at stake, safety is of utmost importance. You should know the implications before you involve in any form of trading, be it manual or algorithmic.
Also Read: Capital Requirement for Algorithmic Trading : Myths and Facts
How Safe is Algo Trading? Our Opinion
In my opinion, the real question people should ask is “How safe is manual trading?”. Manual trading can have lots of failure points – delay in placing orders, selecting the wrong instrument/quantity, network glitches, interference of emotions, etc.
Algo trading overcomes all these problems but it’s still criticized because it eliminates the “human” element from trading.
There are points of failure in Algo trading too, but those are relatively less probable and with technological advancements, it’s getting even better and more reliable.
Do not fall into this trap of comparing manual trading with algo trading, rather start learning algos as that is the real future. And it’s absolutely SAFE.
Mitigating the risks of Algo Trading
As stated above, algo trading has failure points too. But there are ways to control that. We’ve listed down 5 proven ways to control the risks associated with Algo trading:
- Start with minimum capital and then increase gradually. It’s not true that you need to spend millions to start with algo trading. With the technological revolution, you can start with as minimum as you want and then grow upon it slowly.
- The stock broker should be chosen wisely. Assuming you would use the broker APIs to place orders automatically through algos, make sure that you evaluate the API latencies and error rate before using those APIs in your algorithmic systems.
- It’s better to start with an established algo trading platform rather than writing your code manually. These platforms already account for safety and would make sure that you don’t have to worry about unwanted risks. Check out Amibroker or Tradetron if you are looking for trustworthy platforms.
- Hedge your positions and never trade naked. This is especially true if you are taking overnight positions as there is always a risk that the market may open gap down the next day because of macro-economic factors
- Last but not the least, a stable and fast internet connection is the key for algo trading. You don’t want to get into situations that you could not square off your losing positions because of disconnections of your internet.
Final Thoughts
Every novice trader stumbles upon this thought that how safe is Algo Trading? And it’s quite natural. In all aspects, the benefits associated with algo trading overshadow its risks. And here we are talking only about technology risks that could be easily overcome if you consider the mitigation steps above.
We would leave you with a few more questions to reflect upon:
- Are electric cars safe?
- Is your home automation system safe?
- Is it safe to use mobile phones as the battery “might” explode?