With the improved version of technology, the implementation of algorithmic-based trading systems is also increasing globally across the financial market taking the place of human-backed manual trading. Broking houses, fund houses and investment bankers involved in investment and trading now use such algo-based trading software for high-frequency trading.
Compared to manual trading, Algo trading can perform millions of transactions in a fraction of a second not only saving the time of the traders but also generating more volume with a high frequency of trading with better accuracy in various market conditions. While manual trading performs at a slower speed but can work with more informed decisions.
Algo Trading and Manual Trading both can decide to choose the trading strategy as per the market conditions and risk-bearing capability of the traders. Both can make decisions or change the decisions and apply the right strategy that can work as per the market trend. But do you how fast they can react in certain market conditions if there is a sudden change in trend? Here we are going discuss about how fast and effectively they both can react.
Topics Covered :
- Algo Trading vs Manual Trading
- Which one is better Algo Trading or Manual Trading for changing market conditions?
- What Algo Trading can do better?
- What Manual Trading can do better?
- How quickly and which one reacts faster to market changes?
- Conclusion
Algo Trading vs Manual Trading
Before we try to understand the capability of making quick decisions in changing market conditions, let us understand their mechanism and how they work with certain rules and principles to perform efficiently avoiding most of the risks.
Manual Trading
Manual trading is done by humans using traditional trading platforms, on which they put buy or sell orders after analysing various factors like doing market research to understand the market trend, find the best stock, analyse the fundamentals of the company and then perform the technical analysis to identify the best buying and selling levels.
Manual trading is time taking and a tedious process as humans consider various factors like analysing the historical price data of the market or underlying security, considering the economic data, other economic growth indicators and the company’s financial performance. Manual trading is slower than algo trading but can make more informed and controlled decisions.
Algo or Automated Trading
Algorithmic or automated trading is performed through computer software that is designed and developed with a set of rules through machine learning-based algorithms and programming to analyse the market conditions while considering the various factors and then deciding to place the orders.
The algorithms are designed to perform or operate with different trading strategies as per various market conditions. However, traders can manually set or choose the desired strategy to trade in the market. Algo can perform millions of transactions at lightning speed, generate huge volumes of trade and can react quickly in changing but known market situations.
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Which one is better Algo Trading or Manual Trading for changing market conditions?
Both Algo trading and human-backed manual trading are well-trained to analyse the market conditions, and current trends or analyse the technical factors before taking any buying and selling decision. The difference is that algo trading can do the same at a much faster speed than humans and can do multiple transactions at a time with a huge volume of trades.
Just like humans, Algo Trading can make the right decisions when initially set to work according to the trading strategy. It can consider only those factors that are correlated with current market trends and formulate the best profitable strategy to implement. But what about the reaction or how fast Algo software can take its decision when the market changes suddenly?
What Algo Trading can do better?
Capable of Analyzing Data Quickly: When it comes to dealing with a huge volume of datasets, automated trading bots work much faster than humans. It can read, analyse or calculate a large quantity of statistical complex data within a fraction of a seconds with no errors. Hence, with faster analytical processing it can make faster decisions in trading with swift response to changes in such data.
High-Speed Multiple Trades: Automated trading software can handle multiple transactions at a time with the capability to trade in different securities trading on different exchanges. It can handle a huge number of bulk transactions simultaneously to generate a huge volume. The accuracy is high and performs in various market conditions if there is too much volume of trade in the security.
Decisions Free from Emotion: Human decisions are highly influenced by their emotions and that is a natural phenomenon for them. In trading, such emotions become part of their decision-making process. Algo-based automated systems are free from such emotions, and they can take unbiased decisions based on their logical parameters and data patterns aligned with the market trend.
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What Manual Trading can do better?
Capable of Making Complex Decisions: The human brain works by envisaging the past, future and present situation and then making the right decisions. In unexpected complex situations, it can make the best decision that is good for them.
For trading in such unprecedented situations, traders can analyse various factors like the fundamentals of the company, or use the technical indicators suitable at that point in time. Humans can make better decisions in such unexpected or unprecedented market conditions.
Better Flexibility with Adaptability: As manual trading is backed by humans, traders can immediately adjust their trading strategies or more people can be deployed to handle overload situations. Manual trading is capable of adapting itself to unexpected changing market conditions that can be affected due to unexpected news, events or abrupt market movement.
Quick Reaction to Changing Market: As we told you, the manual trading system is highly flexible and adaptive to extreme market conditions compared to algo trading. Market dynamics keep changing, it can be highly volatile and influenced by erratic news events. Humans can quickly adapt and reach in such situations and make decisions based on their expertise and experience.
How quickly and which one reacts faster to market changes?
As we all know computer programs can operate at lightning speed and perform millions of calculations in milliseconds. Hence, algo-based software can also take the trading related decisions and put orders at this lightning speed in the various market conditions.
Compared to humans, Algo can react much faster and make quick decisions in changing market conditions. But Algo can react faster only when the changes in the market conditions are as per its training data sets that have been used to develop such AI-based Algo trading models.
If any unprecedented situation comes that is unknown or strange for Algo bots, either it will not react quickly or can make the wrong decisions based on its set of rules and programming.
In such situations, human-backed manual trading can make better decisions, though they can take little extra time to analyse the situations based on their past experiences but would make a well-informed and better decision to minimize the risks and make their trading strategy profitable.
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Conclusion
No doubt Algo trading can make much faster decisions and can handle large volumes of data and trading tasks in the shortest time period compared to manual trading. But still, there are certain unexpected market conditions that can affect the decisions of automated trading systems.
The response time of Algo could be from milliseconds to microseconds depending on the capability and speed of the Algo programming and computer hardware system.
On the other hand, human-operated manual trading can take time to respond or react to various market conditions. But humans can make a well-informed and balanced decision while considering various factors like upcoming market situation, risk-bearing capability, availability of funds and the strategy that can work best for them at that time.
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