What is algorithmic trading –
Algorithm is a series of instructions that are pre-defined in a system and are usually executed by the computer itself. Trading just involves buying and selling of assets. Thus, algorithmic trading is using a computer to execute trades. It is a complex and expensive mechanism that is usually done by big Hedge funds or proprietary desk how have access to a lot of capital and manpower who can build and run these systems.
Retail Trading –
Retail Traders can be defined as individuals how does not have access to a lot of information and have a limited capital and their aim is to make a quick buck. Most of there trading decisions are based on the information that is being broadcasted to them by the finance news channels or the so-called market gurus. They hardly focus on reading the companies financials and are hyper focused on non-existent market patterns.
But in this new era of AI and the advent of Large Language Models like ChatGpt there is a new dawn for retail traders or someone aspiring to become a full-time trader. Anyone who has a clearly defined set of rules and strategy can look up on the internet for an AI powered platform that has been trained to understand it. And explain his or her strategies in plain English and the model will make a system for you that will run on your computer and take the trades based on the instructions.
Pros and Cons of Retail Algorithmic Trading-
Pros – Traditional retail trading is more like unsystematic gambling whereas algorithmic trading is more like playing poker. While there is luck involved but it is basically a game of skill and risk management. Trading is a zero-sum game with explicit winner and losers. When you trade in the markets you trade against everyone be it a retail investor like yourself or be it a big hedge fund manager so when you create a systematic approach you can beat them if you put your mind to it.
Additionally, when you switch to algorithmic trading you are forcing yourself to think analytically. You are thinking of scenarios if your portfolio goes down by say 10 % what should be your exit strategy or what can be your counter trade to hedge your loss.
By implementing the algorithm, you are significantly reducing the emotion involved in your trading decision.
Cons- Even though algorithmic trading offers a lot of advantages it is not a perfect system to everybody. With ChatGpt like platforms that have reduced the dependency of being a very good coder to start algorithmic trading, its still pretty complicated. You have to learn the basics of making a trading strategy, what is the role of different technical indicators, what are the different fundamental metrics that should be given importance, what should be the appropriate risk management system to protect your account. If you are truly not interested then it would be a lot of effort.
Finally, be it trading or investing there is inherently risk involved in it. Big complicated systems also fail, there is no guarantee that you will outperform the markets. And after deploying so much efforts and not getting the money’s worth out of it is heart breaking.
It is an investment with no guaranteed returns but for those who love trading it is a short worth taking.
Conclusion-
Algorithmic trading is not for everybody. While everybody can use basic algorithms to make sure they are reaching their investment goals. Majority of investors would prefer to manually put in their trade orders to buy in some stocks or index funds and meet their investing goals.
But algorithmic trading does offer a number of undeniable advantages. It gives you a great speed and computational power without emotional decision making that is not possible for an ordinary mind. But even for people who don’t want to learn and implement complex algorithms, they can still use basic algorithms and meet there investing goals.
But for those who are interested in learning trading you need to be aware of this new concept where retails are entering into the world of algorithmic trading.