The Pros and Cons of Algorithmic Trading

Algorithmic trading is a polarizing topic in wealth management, with both advantages and challenges. Some experts see great potential for it, especially since the introduction of AI. Others like a mix of this approach with a human touch, while some prefer manual trading. In this article, we look at the advantages and disadvantages of algorithmic trading. We invite you to read on!

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The Pros and Cons of Algorithmic Training in a Nutshell

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So, what are the benefits of algorithmic trading? What risks come with it? Let’s examine this in more detail, starting with the advantages!

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The Pros of Algorithmic Trading

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Speed

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Algorithmic trading is extremely fast. With it, you can execute trades in literal milliseconds. As a result, they can bring profit even from the smallest asset value fluctuations.

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Lack of Human Error

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One of the main pros of algorithmic trading is the elimination of human error in decision-making. No mistakes will occur due to misreading information or cognitive biases. As a result, the accuracy of such efforts will usually be visibly higher than that of manual trading.

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The same goes for emotions, which frequently impact our decisions. Since algorithms (and AI which is currently used for this purpose) are emotionless, they won’t be affected by their mood or feelings and will always remain 100% objective.

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Data Processing

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Modern algorithms incorporate artificial intelligence. As a result, they can process much more data and make even better decisions.

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One of the ways how AI changes wealth management in this particular area involves news and social media feed analysis. Engines based on machine learning can extract insights from both financial data and information in the world; then, they juxtapose such data with what they have been trained on and can make more accurate predictions (and investments), since such engines consider many more variables than a human being.

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Backtesting

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You can also use algorithms to simulate numerous scenarios and optimize them for maximum effectiveness (in relation to your HNWI wealth management expectations).

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Risk Management

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Finally, you can set up certain risk management criteria and the algorithm will follow them at all times. This is one of the most important advantages of algorithmic testing, since human traders may often have difficulty analyzing all potential investments to ensure that the risk level is met.

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The Cons of Algorithmic Trading

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Costs

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You will need to invest a lot of resources into algorithmic trading in order to have a ready, customizable algorithmic trading module in your wealth management platform. This is because developing such algorithms from scratch is both time-consuming and requires extensive programming knowledge.

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At the same time, it is an investment that pays dividends, so the question here is whether you can pay a lot at once to get a steady return. After all, algorithmic trading is less expensive in the long run.

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Constant Updates

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You don’t just develop an algorithm for trading and reap the benefits. Your algorithm needs to be constantly updated to keep up with the changes in the world and technology. This means that you need to keep up with the current trends and react on time.

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This also requires you to hire a programming expert who can prepare and implement the updates.

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Regulatory Compliance

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Algorithmic trading may have many pros, but it also has one powerful con: it is highly regulated in a number of countries. This means that you cannot just prepare any type of algorithm and enjoy steady returns—you need to start by learning about the law and then create it based on the regulations.

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You Still Need to Monitor Your Trades

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The market can get unpredictable; real estate investing during recessions is an excellent example of that. This means that even the best algorithms might fail to understand the market at certain points. As a result, even though you automate trading with algorithms, you still need to monitor it.

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When Should You Opt for Algorithmic Trading?

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When is the best time to introduce algorithmic trading? For it to be a good strategy, you need to meet these certain requirements:

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• you have the capital for initial investments,
• you look for long-term wins,
• you have the knowledge and IT skills in your organization to develop and maintain such an algorithm or you use a wealth management platform with robust AI features,
• your client agrees to this trading method,
• you are ready to monitor the trades.

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Additionally, we recommend using algorithmic trading in situations where you need to handle numerous trades and assets—simply, when you don’t have the resources for manual trading due to the vast volumes of securities.

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The Takeaway

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Algorithmic trading has its pros and cons, but in general, it is a good strategy, although not a perfect one. Whether you wish to embrace it or prefer manual trading is entirely up to you. At the same, remember that algorithmic trading is not enough for your clients—you need to combine it with intuitive, transparent reporting and excellent strategies. How do you plan them? You can use the WealthArc platform—contact us and book a demo to learn how we can help your business!

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You might also read: WealthArc and ZeroLink are transforming wealth management with Artificial Intelligence

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