The speed and accuracy of an algorithmic trading system is beyond human. It draws the decisive line between a good trade and a bad trade.
There are several reasons why algorithmic trading is better than manual trading. It performs the complex calculations, it does not miss out on trading opportunities, and it faces no emotional conflicts that arise when you’re making trading decisions.
But none of those reasons is as convincing to me as this one: good execution. The speed and accuracy of an algorithmic-trading system are beyond human. It draws the decisive line between a good trade and a bad trade.
To illustrate this, let’s take the trade setup for scalping as an example:
Buy Trigger – Note the High when Parabolic SAR (0.02,0.2) < Low AND Open equals Low
Buy – Current High > Noted High
Sell Trigger – Note the Low when Parabolic SAR (0.02,0.2) > High AND Open equals High
Sell – Current Low < Noted Low
Like any good trader, let’s also add a stop loss and a profit target. Now when using it for scalping crude oil, you’ll notice that it’s a profitable trading strategy!
It earns you a few points every day, and in some time, your equity and drawdown curves look like this:
Optimising the profit target to one that suits this strategy, your CAGR increases to 29.44 percent.
Now, we know that scalping requires perfect timing. The strategy is to steadily hit only a few good points per day and earn well over the years. But if there’s going to be some delay in trade timing—leading to 0.01 percent slippage in this example—the profitability of every trade gets affected.
Add a slippage of 0.02 percent instead and the equity curve flips perfectly, turning one of the best strategies you’ve seen into a horror that you cannot ignore.
So, I repeat. The speed and accuracy of a trading algorithm is beyond human. It draws the decisive line between a good trade and a bad trade; a good strategy and a bad strategy.
Think about this when you come up with your next trading idea.
Time to start using execution algorithms!
(The author is Founder of Arque.Tech. Follow him on @hrishabhsangvhi.)Disclaimer: The views and investment tips expressed by investment experts on moneycontrol.com are his own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.Subscribe to Moneycontrol Pro and gain access to curated markets data, trading recommendations, equity analysis, investment ideas, insights from market gurus and much more. Get Moneycontrol PRO for 1 year at price of 3 months at 289. Use code FREEDOM.