Algorithmic trading vs traditional trading: Which path is right for you?
Over the years, the stock market in India has experienced a myriad of transformations. The integration of cutting-edge technologies and rapid digitalization has led to a reduction in settlement time, an acceleration in the market pace, and the emergence of new trading techniques.
While traditional trading has been the norm for centuries, technology-enabled algorithmic trading is taking over the market by leaps and bounds owing to several benefits. In this piece, we delve into the comparison between these two types of trading and will figure out which is the best method for investors.
The basic difference
In traditional trading, the participants follow a manual approach to trading stocks, options, currencies, and more. The traders make buying and selling decisions based on their own analysis, economic indicators, and other market factors. This method completely relies on human judgement, intuition, and emotional intelligence while making a trading decision.
On the other hand, algorithmic trading involves the use of complex algorithms and computer programmes to automate the trading process. It requires no human intervention after a certain period, as the algorithms can be designed to execute decisions based on historical data, predefined rules, and market indicators.
On the basis of this difference, a comparison can be made in terms of three characteristics: speed, flexibility, and risk management.
Speed and accuracy
Undeniably, algo trading has much faster execution and accuracy than traditional trading. The algorithms automate the entire process of automating the quantitative analysis of a stock, then placing an order against it and capitalising on multiple market opportunities. This enables a trader to execute hundreds of trade orders at a time, which is not possible in traditional trading.
Flexibility and customization
Algo trading allows for customization of a strategy at the beginning of a session and then functions in a certain way that allows for the capture of trading opportunities in a specific manner. It has the provision of custom algorithms that give the traders the choice to change the strategies. On the other hand, traditional trading has a much slower pace that allows the trader to monitor each trade and customise it according to their own trade philosophies and investment goals.
Risk management
Automation is the hallmark of algo trading, which allows traders to execute multiple trade orders with minimum human intervention. It further enables the use of complex trade and risk management strategies in a swift manner that reduces the chances of error. Moreover, algo trading can control an investor’s loss by exiting on a stop loss automatically. Traditional trading in this case might be susceptible to emotional decision-making, greed, and fear.
All things considered
The decision to choose between new-age algo trading and traditional trading depends on several factors. However, it can be narrowed down to trading experience, resources or capital, and risk tolerance. If someone is a beginner, they can start with traditional trading in a bid to understand the market intricacies, and as they gain the relevant experience, they must switch to algorithmic trading for better results.
It is essential to know that both methods have their own advantages and limitations. Therefore, you must choose the method that best aligns with your trading goals and style, as it will aid you in obtaining more lucrative opportunities in the stock market.
Hemant Sood is the Founder of Findoc
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Updated: 22 Oct 2023, 11:41 AM IST
