Algo Trading: The Truth!
Whether you’re a manual trader or an algorithmic (algo) trader, each approach has its own pros and cons
However with algo trading, the drawbacks are often overlooked.
This happens because, with algo trading, you’re not actively managing trades yourself…an EA (Expert Advisor) or trading bot does it for you.
This hands-off approach can create a false sense of security, as though using a bot guarantees success.
But, just like any other trading method, algo trading has unique advantages and disadvantages every trader should understand.
Many algo trading groups promote the benefits while downplaying the downsides, often to draw in new users.
At POW, however, we believe in transparency.
We want you to understand both the benefits and limitations because the more informed you are, the more successful you’re likely to be.
If you’re unfamiliar, algo trading is a method where trades are executed based on predefined rules set within an EA. This computer-generated algorithm is designed to remove some of the guesswork and emotion from trading.
For algo traders, time is spent primarily backtesting strategies on historical data rather than analysing charts or waiting for setups in real-time.
Advantages of Algo Trading
- Execution Speed: Algo trading’s speed is unmatched. Algorithms can place trades within fractions of a second, much faster than any human, which is particularly advantageous in volatile markets where quick responses can make a difference in profitability.
- Emotion-Free Trading: Although trading always involves emotions to some degree, algo trading reduces emotional reactions to in-the-moment decisions common in manual trading.
Since algorithms follow predefined rules, they avoid pitfalls like panic selling or impulsive buying, leading to more consistent performance.
- Backtesting Capability: Algo trading allows for extensive backtesting, letting traders test strategies on historical data. This can help refine strategies before they go live.
The key, however, is understanding how to backtest and analyse data effectively—a skill we teach all our members at POW.
- Diversification: Algo trading allows you to diversify across strategies and currency pairs.
Our proprietary software, ‘Portfolio Builder,’ lets members test and run multiple pairs, whilst covering various market conditions and strategies - something that would be nearly impossible for a manual trader to replicate.
Disadvantages of Algo Trading
- Technical Reliability: Algo trading depends on technology - software, connectivity, and platforms. System failures, lag, or glitches can disrupt trades, something largely out of a trader’s control.
- Over-Optimisation: Backtesting is beneficial but can lead to over-optimisation, where a strategy is excessively fine-tuned for historical data and struggles in live markets.
While risk minimisation strategies exist, like reducing EA inputs or using the all important ‘Walk Forward’ phase (backtesting in and out of sample data), over-optimisation remains a common pitfall.
- High Development and Maintenance Costs: Creating and maintaining a high-performing algorithm requires significant investment in programming, data, and technology. Frequent updates are also essential to stay effective as markets change.
Which is why many members join POW to leverage our research, testing, and development - we handle the heavy lifting of updates and maintenance.
In the end, algo trading offers significant advantages but requires a clear understanding of both its potential and pitfalls.
Staying informed can help you make the most of the rewards while avoiding the common risks of this advanced trading approach.
Interested in learning more about what POW offers?
Click here to apply, and we’ll send you all the details you need to get started.