How Algorithmic Trading Can Slash Losses For Investors?
Dynamic, but volatile, diversified, but nonlinear, the stock market is a complex riddle for novice traders. On the other hand, people with adequate functional and technical knowledge of the market seldom jeopardise their investments. It doesn’t mean they never take risks, which cannot be avoided completely; they curb losses because of good anticipation and forecast skills. And, in the age of artificial intelligence (AI) and predictive analysis (PA), investors can opt for algorithmic (Algo) trading, also called automated and mechanical trading to predict the near future and avert maximum risks. Today, more than 70 percent of traders in the US use algorithmic trading systems.
A stock market is as unpredictable as the mood of a toddler. That’s why prognostication of a stock’s price is a tough challenge for the majority of people. There are various macro and microeconomic factors that greatly influence the performance of a market, can be understood only by a seasoned investor or trader. Thus, besides having in-depth knowledge of the country’s economic policies and global events of significance, one should also be able to decode future trends suggested by Algo trading.
Importance of data analytics
Undoubtedly, volatility is the intrinsic nature of the market, but it is also true that stock prices do not change randomly. To a great extent, stock prices can be analysed as well as predicted with the help of time-series data. Moreover, when AI, PA, Machine Learning, and Big Data are on the culmination of development, analysis of time-series data is no more challenge. In fact, both fundamental and technical analyses are now easier than ever and using them aptly, a significant percentage of traders is capable to generate a better return on investment (ROI).
The collaborative efforts of data scientists and financial analysts are increasing the reliability of Algo trading, investors’ shield against risks and uncertainties. On the one hand, fundamental analysis provides a detailed picture of a company’s financial, operational, and management capacity. Technical analysis, on the other hand, gives quantitative information on stock prices and historical returns. Based on these two analyses, one can get the approximate future prices of stocks and may take a sensible decision accordingly.
Advantages of Algo trading
Algorithmic trading is not as complicated as it sounds, advanced trading software can ensure precise entry and exit into the market. However, some traders work on customised software using self-made custom indicators and strategies. Although customised software ensures more flexibility and better trend analysis, good technical knowledge, coding skills, and language proficiency are the prerequisites.
One should choose the right broker and platform to execute the trades. Also, no need to make haste as practice makes one perfect and what can be a better place to learn and practice than a stock simulator that gives the experience of the real market at zero investment. Secondly, one should acquire quality historical data from authentic sources and back-test the strategies on his/her own software. Nowadays, even traditional investors are experimenting with algorithmic trading because it helps them with taking quick and efficient trading decisions. The other benefits of algorithmic trading are diverse trading, improved order entry speed, minimisation of emotions, and a highly disciplined investment approach.
Conclusion
As precaution is always better than cure, adopting insightful strategies to avert losses is the practice of intelligent investors. AI-driven algorithmic trading is quite useful to predict future trends and stock prices. Moreover, like other businesses and occupations, 100 per cent protection from risks is impossible. They can be minimised, but can’t be avoided. Whenever a successful investor encounters any loss, s/he does not give up but takes immediate corrective actions to circumvent further losses and algorithmic trading is effective in such a scenario, too. It does not mean that one should completely rely on algorithms and artificial intelligence, substantial knowledge of the stock market is mandatory for any budding investor and one should keep on raising it through reliable sources.
