Experts at the London Stock Exchange believe that a huge proportion of trading is now done using algorithms. In some markets, it’s estimated to be around 80 percent of trading volumes, which means that it’s become a huge part of financial trading. Software that can recognise patterns and make the appropriate trades is now in very high demand, with many people willing to pay large sums of money for the technology. This is prevalent across the board, with stocks, currency and commodities all involved. The question then, is how effective is this method of trading, and is it better than manual chart observation?
While it’s certainly true that a huge proportion of trades are indeed done by automated algorithms, they aren’t necessarily the most profitable way of trading. In reality, this kind of system is used more as a way of mitigating risk than it is to maximise profit – at least when it comes to stocks. Banks, investment and mutual funds use this system to split trades down into smaller positions to help lower risk and manage the overall size of investments.
Profitability was questioned when, in 2009, research suggested that the total profits of 300 firms that specialised in high-frequency trading (often comprised mainly of algorithmic trades) made $21bn USD in profits. While this does seem like a huge amount, it is in fact relatively low for the sector, when you take into account the sheer volume of trades.
Automated trading has quite a different significance when it comes to forex trading. This is primarily because it’s far more accessible. This has led to communities of coders and developers who have created their very own scripts and pieces of software, which are linked to their forex account and platform. They observe charts and make trades just like algorithmic trading does with stocks, but there is a much bigger focus on making large profits from smaller amounts. Mitigating risk doesn?t have quite the same importance.
A good example of this would be the Automated Trading Championships, in which individuals from all over the world have their automated forex “robots” trade in competition. Over a three month period, 1000 percent returns on investment are not unheard of.
Despite this apparent potential for serious profits, according to reports, only around 20 percent of forex trades are conducted by these so-called expert advisors. This is potentially down to the fact that they are inherently risky, and finding a reliable one on the internet certainly has its hazards.
It seems then, that chart pattern recognition software certainly has its place in the world of financial trading, but it isn’t an immediate way of being successful. At the top of the scale, it can be effectively used to work faster than a human, managing risk with lower profits. At the bottom of the scale, you’ve got individual forex traders, who are constantly searching for the perfect EA that can net them a huge profit.