Comparisons between Algo and Manual Trading: Differences
Algorithm trading in the financial markets is taking the place of humans in performing various tasks, allowing them to take other crucial decisions to make their trading journey more profitable. Algo-based trading software and applications uses machine learning and AI-based algorithms to analyse the market situation and trade accordingly. Manual trading relies on human intelligence and judgement to analyse and trade in the market.
What is Algo Trading and How it Works?
Algorithm trading is an automated trading system to perform various trading-related tasks, including order placement, profit booking and exiting from the trade positions. The trade decisions and actions in Algo trading are based on various market data like price, volume, market timing and conditions. Once activated, Algo can take the right action as per the predefined conditions based on the trading strategy.
Algo trading works on machine learning based algorithms to gather and analyse the market data to correlate various factors affecting the market movement. Algo can itself use the technical indicators and other parameters to identify the market trend and enter into the trade position accordingly. It can work on predefined strategies, or users can create or customise their own strategies. Most importantly, it can perform multiple transactions at a very fast speed with high efficiency.
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What is Manual Trading and How Does it Work?
A manual trading system is a traditional way of trading in the market where humans deploy a workforce to perform every task using the trading software. From market analysis to stock selection and order management or execution of transactions, everything is done manually. It is a human-powered trading system performed through trading software and other tools to trade based on the market situations.
A manual trading system works on the decisions of humans, where traders or investors use the price chart and apply technical indicators to gauge the market trend, and then decide whether to buy or sell. The underlying security is analysed to find the trade potential, and based on that, the trade is executed. Further profit booking and exiting from the trade positions are also decided by the traders with manual transactions.
Recommended Read: Algo Trading: How technology is changing the game
Difference Between Algorithmic Trading and Manual Trading
Algo trading is different from manual trading in terms of making various tasks automated with better speed and efficiency. Both have their own pros and cons with adaptation among the various categories of traders across the different market segments. Comparing both of them will clarify the misconceptions and key differences between them with certain parameters.
Algo Trading vs Manual Trading: Comparison
| Comparing Parameters | Algorithmic Trading | Manual Trading |
| Definition
|
Algo trading is simply a computer programming-based automated trading system used to perform various activities. | Manual trading is a basic trading practice, where the traders use simple trading software and apps to perform every task. |
| Mechanism | It works on the machine learning based algorithms to analyse the market data, stock patterns and consider technical and fundamental factors to execute the transactions. | Using computers, humans use technical charts, price movement and check market trend using their own knowledge and experience to make any trade decision. |
| Efficiency | Efficiency is very high in terms of performing multiple complex transactions at very high speed, with the ability to make quick decisions and execute transactions. | Compared to Algo, efficiency is low due to the manual handling of every task, as humans need more time to take decisions or execute the various transactions.
|
| Precision | Due to computer-based automated tasks, the precision level is very high while performing multiple and complex transactions with quick results. | The accuracy can be compromised due to human intelligence involved, and while performing the complex transactions, there is a chance of errors. |
| Emotional Bias | As the entire action or transaction is driven purely by computer-based programming, there is no room for emotional factors to influence the trade decisions in Algo. | The trade decisions and various actions can be influenced by the sentiments of humans like fear, greed, anxiety, enjoyment, unhappiness and FOMO. |
| Monitoring | All the activities in the market can be monitored automatically with the round-the-clock system that provides alertsand takes appropriate actions as needed. | Monitoring is not possible all the time, due to manual handling and the limits of human behaviour to work continuously without taking rests. |
| Flexibility | The system is not flexible to work beyond the set of instructions and programming infused through the algorithms, but its operational activities are highly scalable. | Highly flexible in making decisions in response to the unexpected changing market conditions, but no scope for scalability without deploying additional human power. |
| Capability | It is capable of performing millions of transactions in a fraction of a second with high accuracy, with the ability to handle multiple tasks simultaneously. | There is a certain limit to handling the tasks and performing the various actions as per the practice and competence to deal with different tasks and tedious actions. |
| Costing | The initial cost of deployment is too high, while the running and maintenance costs are very low. | The initial cost of hiring people is low, but the running cost is high due to regular disbursements. |
| Judgments | The judgments or crucial decisions are purely taken on the basis of quantitative information and statistical data related to the market. | Apart from market data, the decisions are also taken while considering various factors like the market situation and the sentiment of the traders. |
Recommended Read: Algo Trading Features
Summing-up
Algo-based trading software can be far better than manual trading in terms of speed, accuracy and efficiency. While understanding and dealing with unexpected situations, manual trading can do the job better. Algo trading is fully automated but can be controlled and customised as per the needs of the users.
Algo trading software is becoming smarter day by day, with more data inputs used to train the machine learning models through more advanced algorithms to work like humans. In the future, Algo will be able to understand the market dynamics from every perspective to give outputs that are more precise.
However, the manual trading system is still preferred by traditional traders who are not tech-savvy and do not have the reliability of such automated trading software. But a combination of human intelligence and an automated trading system can deal with all kinds of unexpected market situations, fuelling their capability and efficiency with better returns in terms of high profitability at low risk.
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