The power of the algorithms

We could practically duplicate the comment from the previous week, and it would still be valid for today. So this time I have decided to change the theme of the post a bit and talk a little about my real activity in trading and what I do

To be more exact, my approach and activity to the world of trading for years has been carried out from a particular practice: algorithmic trading.

What is algorithmic trading?

Let’s start by trying to define the concept. When we talk about algorithmic trading we are referring to a type of trading based on algorithms. Plainly speaking, that means the automated implementation of decision processes. We are deriving in the machine the moment of making our operational decisions.

The reader should note that we are talking about the moment, the moment in which decisions are made, but never about the decisions themselves. The logic that an algorithm contains has been developed by a trader, a market strategist who is in charge of designing each of its points so that they maintain a balance in their decision-making, which is what provides long-term robustness.

This is so, in the vast majority of cases. I am not in a position to say that in all of them, because artificial intelligence is entering with great force in all these processes and can increase the automation part, even reaching the design of strategies itself.

But algorithmic trading accessible to all is the one that refers to the automation of decision-making moments based on the confluence of certain factors or market events.

Who can become an algorithmic trader?

Another of the recurring questions, and I would even say limiting beliefs, is linking knowledge of technologies and programming languages to this activity. An algorithm is a developed software that needs prior programming, of course

But this cannot be a limitation to develop the activity of algorithmic trader. I have always defended that it is necessary to clearly separate the activity of developing algorithmic systems, which requires a marked technical profile, from the activity of trading algorithmically, which does not strictly require having that technical knowledge of software development, but of the necessary capacities to operate and manage an algorithmic system

These two activities must be clearly differentiated to prevent algorithmic trading from being reduced or limited to people with a technological profile

The development of a system or strategy can always be entrusted to a third party, and we focus on the operation

Advantages of algorithmic trading

We are going to list the many advantages that, from our point of view, trading with an algorithmic strategy has:

  • Algorithms are capable of executing decisions and actions in exactly the same way at different moments in time, as long as the data or parameters provided to the system are the same. In other words, an algorithm greatly reduces the psychological bias of our operations as traders, which does not eliminate it.
  • Algorithmic trading does not require being in front of the screen to make decisions. This process of separating the design of the action to be taken with the moment of execution has multiple advantages, which allow the trader more freedom of action and practically total independence of the hours in which he can be available to analyze the market.
  • This separation between the execution of the operation and its management allows the execution of different operations simultaneously. If we program different algorithms, we can attack the market from different fronts or visions simultaneously. This is something very complex to carry out from the point of view of the discretionary trader, or trader who personally operates his operations.
  • The management of the strategy can be carried out by different people. Linking with the previous point, this detachment from the operation allows the management of the strategy to be carried out by different people. After all, these people should only manage the proper functioning of the algorithm
  • The development of the quantitative vision of trading. This need to have an algorithmic interpretation of everything that happens in the market gives us a superior ability to evaluate the performance of strategies based on information from large volumes of data, something very difficult to do manually.

But… there are also disadvantages

Not everything is positive qualities and facts, but algorithmic trading has drawbacks, derived mainly from knowledge that is necessary to acquire and that act as strong barriers to entry.

  • There is a need for technological knowledge. In the event that we develop our own strategies, it is clear that we must master the art of programming to be able to implement the algorithms. If this is not the case, there is the already mentioned possibility of outsourcing this action to third parties, but we must place all our trust in these people if we do not have any technical knowledge. A minimum background will allow us to more reliably evaluate your work
  • The danger of thinking that systems ‘work alone’ must be avoided. THE myth of being under a palm tree while the system works does not exist. Supervision is always necessary to validate and control the perfect functioning of the system. You have to understand that we went from traders to system managers
  • Psychological bias still exists. And it can even be more intense on certain occasions. The theory tells us that we eliminate the part corresponding to the trading decisions, and that should make the psychological component disappear (the algorithm has no feelings), but we may find ourselves on occasions when the algorithm itself makes us doubt and we have to be prepared for it

Despite the fact that we have unfavorable points, the potential and superior processing capacity of algorithms is clear to me, therefore, I do not understand the operation in any other way, except for very specific things

Algorithmic trading within the crypto asset market

Although the trajectory and history of algorithmic trading in what we call TradFi is much higher, we should not underestimate what we now have at our disposal to operate with crypto assets, based on the fact that it has a lot of potential and room for growth.

It must be said that in the cryptoactive markets the margin for improvement in algorithmic operations is very remarkable

But in the end, the guiding principles will be the same, along with the advantages and disadvantages. The cryptoactive market is digitally native, therefore the speed of adaptation of this market will be much higher than the traditional market

Do you want to know more about algorithmic trading?

Well, send me a message or write a comment. Don’t hesitate to ask us… because we can help you introduce yourself to this world in different ways.

For our part, at BELOBABA we are taking steps to increase this type of operation in our portfolio, due to the advantages it brings

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