Picture this: You’re a trader who has been working hard to analyse trends and make trades. You spend hours in understanding various markets and analysing the movement of the stock prices before you finally decide which stock you should buy or sell. Suddenly, you find yourself surrounded by a computer program that executes trade swiftly by just following a pre-existing strategy of investment that is fed into. This is where the debate of algo trading vs. manual trading begins dominating the current scenes in the financial markets globally.
Algo Trading vs. Manual Trading
The question that arises is, which one should you go by? The answer is much more complicated than a simple black-and-white one. But, by the time you finish reading through this, you will be able to make up your mind about which one you would want to use. And, if you still need any more insights, uTrade Algos is always there to help you.
Manual Trading vs. Algorithmic Trading: A Closer Look at the Former
Let’s start with an example. Mr Chiraunji Lal is a dedicated trader for an investment firm. Every morning, he wakes up, analyses various markets, studies them thoroughly and then goes on to make a trading strategy manually based on the various parameters he has studied. Based on the strategy devised by him, to the best of his knowledge, Mr Chiraunji Lal may decide to create alerts on certain stocks to follow their movement and may proceed to buy or sell them based on the trend they follow. Here, all decisions regarding buying, selling or waiting are taken by Mr Chiraunji Lal himself. While he has framed the strategy based on calculations and thorough analysis, he cannot be sure of his strategy till it is put to use and trades are executed.
This is what is known as manual trading. Manual trading is when a trader decides when to buy or sell financial instruments based on his own market research, analysis, and know-how.
Manual Trading: Inherent Features
- The decision to wait, enter, or exit the market is taken by the trader himself based on certain factors like the company’s annual reports, news in the market about a financial instrument, previous trends regarding the movement of the instrument and the like.
- Traders may also rely on technical analysis to understand the movement patterns and then execute the trades.
- In the end, the trader makes decisions based on his own intuition and experience.
Manual trading has been the norm for centuries due to its inherent benefits. While discussing algo vs. manual trading, it is important to understand the advantages as well as disadvantages of both. Let’s start by looking at the inherent advantages of manual trading.
Advantages of Manual Trading
Consideration of Subjective Factors
A natural disaster or a terrorist attack in a certain country may have an impact on its financial markets. A manual trader surely can take such factors into account before making a decision to buy or sell.
As a matter of fact, manual traders may not require specific software to execute the trades. Hence, they may be less expensive than algorithmic trading.
A manual trader who has been studying, analysing and executing trades for a long time can intuitively foresee certain trends and use them to his advantage by making informed decisions.
Increase in Knowledge
A simple fact remains that while studying and analysing financial markets, the knowledge of manual traders grows manifold. This can later be used by investment firms if and when they decide to create an algorithmic trading strategy for themselves.
But, where there are advantages, there are certain disadvantages of manual trading over algorithmic trading.
Disadvantages of Trading
Doing any kind of study and analysis takes a lot of time. For a manual trader, studying trends, and analysing multiple financial markets and instruments can consume a lot of time. By the time they equip themselves with one market or instrument, the decision parameters may change.
While emotions help a person to be intuitive, they can also cloud judgment at times. While trading, it is important for a trader to have discipline to be able to control their own emotions and not let them come in the way of executing trades.
Prone to Inaccuracy
A manual trade’s output is as good as the input given by the trader. Hence, manual trading can be inconsistent and inaccurate if the trader’s know how falters or is biased.
Lack of Accountability
At times, the traders who execute the trades have trouble accepting how their behaviour affects the trade. They lack accountability and may go onto blame the strategy, platform, brokers and the like rather than taking responsibility for their own actions.
Now that we’ve understood what manual trading is, let’s delve deeper and look at what algorithmic trading or algo trading is.
Algorithmic Trading vs. Manual Trading: How Automation Has an Edge Over Traditional
Algo Trading: Inherent Features
- In this case, a pre-programmed computer algorithm will be making all decisions to buy or sell certain instruments based on the strategy instructions that have been fed in its code.
- The instructions are based on historical data analysis and mathematical algorithms and can easily be fed into computer software.
- It tends to be popular among traders who work for large institutional investors but can also be used by individual and seasoned traders who are willing to switch to automation.
Now that the basics of algo trading are clear, let’s know the advantages and disadvantages of switching to it from Manual trading.
Advantages of Algo Trading
Less Prone to Inaccuracy
Since the computer program will be executing trades based on mathematical as well as trend analysis in the case of algo trading, it is less prone to inaccuracy. Once the predetermined strategy is fed into the code, the program will buy or sell based on what the analysis shows up.
Algo trading allows you to track multiple financial markets, instruments or assets at the same time. This leaves a lot of time for traders to do other things. In manual trading, the traders themselves have to track all market movements themselves, and it takes up a lot of time.
Disciplined and Devoid of Emotions
Another thing that algorithms don’t take into account while executing buy or sell decisions is emotions. Hence, the personal biases or emotions of the traders stay at bay, and all decisions are based on mathematical calculations and trend analysis by the computer programme.
Another big advantage of algorithmic trading is that one can test the software on a demo account before deploying it.
In a deliberation over algo trading vs. manual trading, it is important to also look at the disadvantages of the former.
Disadvantages of Algo Trading
Since algorithmic trading requires both knowledge of manual trading strategies and computer programming, the costs involved may be significantly high.
No Consideration of Subjective Factors
Another con of algorithmic trading is that it doesn’t take into account any contingencies. Natural disasters, terrorist attacks and the like impact the financial markets globally and hence, their consideration is needed when executing a trade. This does not usually happen in algorithmic trading.
Possibility of Failure
The entire software in algorithmic trading takes decisions based on a predetermined strategy that is fed into it. Hence, if the instructions are not accurately put, the entire algorithmic trading system may fail to produce the desired results.
Now that we’ve discussed automated and manual trading in detail, let us look at what sets them apart.
Difference Between Algo Trading and Manual Trading
|Parameter||Algo Trading||Manual Trading|
|Execution||By computer programme.||By a human trader.|
|Speed||It is quicker. It can take just milliseconds to analyse multiple financial markets.||It is slower. A human trader will take time to research and analysing markets and instruments.|
|Scope||Wider as multiple markets can be scanned simultaneously.||Narrow as multiple markets cannot be scanned simultaneously|
|Time||Quicker in executing trades based on trend analysis and mathematical algorithms.||Slow as it is dependent on human trader’s speed of analysing financial markets and instruments.|
|Risk Of Bias||Less as computer programs execute trades.||Higher human emotions may interfere with fair judgment while making decisions.|
|Testing||Testing is easy and quick.||Testing a manual strategy can be difficult.|
Which Trading Strategy iIs Best for You?
Having highlighted both the pros and cons of algo and manual trading, many of you might be wondering which is better. Well, that decision will depend on the following factors:
- Experience: If you are a new trader, traditional or manual trading is something that can help you learn more about markets, instruments and other things that will help you become a seasoned trader. However, if you are already a seasoned trader and have enough knowledge about computerised systems, then going with automated or algorithmic trading might be better for you.
- Risk Tolerance: The amount of risk you can take also can help you decide which type of trading you may opt for. If you are starting out, your threshold of tolerating risk is low. In that case, it might be better to stick to manual trading. On the other hand, if you feel your threshold is higher, then algo trading might be good for you as it is designed to mitigate some amount of inherent risks.
- Cost Aspect: If you are starting out as a trader, you might not have enough money to invest in a specialised algo trading software. Hence, manual trading might be better for you. However, if you’ve been a trader for a while and have the experience and resources to invest in a computerised system, then algo trading might work for you.
In conclusion, while the debate on automated trading vs. manual trading continues, it is important to understand that each comes with its own inherent pros and cons. Also, when you understand what is the difference between the two, you can make an informed decision. When you do make an informed decision and decide to go for algorithmic trading, remember uTrade Algos is always here to help you and be your guide to cracking this like a pro!