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Rise of the Machines

Algorithms trading on stock markets are no new thing. In an era almost defined by machination and computation replacing human labour and input, it is no surprise that trading algorithms have long been a part of market trading. Though the algorithms and trading strategies started a fairly rudimentary signal providers for manual traders, and lived a long life as what manual traders might call ‘shortcuts’ in that one-button execution of complex orders that have been pre-programmed, recently algorithms and machine-learning have taken over as the most successful trading systems available.

Vast amounts of data, and the subsequent reaction by trading algorithms in placing trades, is something human traders would neither see or even regard as ‘logical’ has elevated automated trading algorithms (also known as ‘Bots’) to the top of the market scrapheap. Even the most diligent, tuned-in, savant of a trader will have trouble executing trades at the level of precision required to beat a fairly basic algorithm. Swing trades, or long-term positions, are still performed to a far greater level of accuracy and therefore profit due to algorithms reacting to market conditions in both an emotionless and more accurate way for the most part.

High-Frequency trading has seen a marked uptake in popularity due to the fact that algorithms are limited only by the speed of communication to the exchange, and not human factors. Many companies set up Virtual Private Networks with servers mere meters from main exchanges, limiting slippage and allowing algorithms to work at full capacity.

Algorithms that are comparatively longer term with regards to trade duration will hold on to a trade for months, perhaps direct-hedging, perhaps allocating the mathematically correct portion of a trading account’s margin to each trade to mitigate loss. Human traders will need to have a very firm constitution to perform comparatively, as longer-term positions require traders to weather loss for sometimes a long stretch, and will tend to ignore technical indicators due to the stress of a long term open position.

Machines simply do what they’re told, be it on the factory floor or in the chaotic world of the exchanges. If they are programmed right, doing what they are told will both outperform manual traders globally (a trend we have seen for years at Tower Tech), and make life easier for those who are running them.

The trading world seems to agree.

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