Algorithmic Trading & Copy Trading: Why These Two Strategies Of Trading Are Getting Popular In Recent Years?

The way we do things is constantly changing, even if what we are doing remains the same. For example, every train in Singapore used to require a driver. These days, except the East-West, North-South lines, all other trains in Singapore can be operated without a driver.

Likewise, commercial planes today operate largely on auto-pilot except for specific tasks like taxi, take-off and landing. Based on how technology is evolving, there is a good chance that within the next 1-2 decades, cars in Singapore will also be able to cruise on our roads using driverless technology.

Using technology to automate everyday activities isn’t just limited to transportation. In finance, technology has been used to help traders make returns from the financial markets. And like their counterparts in the transportation sector, some of these automation methods have the ability to outperform human traders.

What Is Algorithmic Trading?

If you are not familiar with algorithmic trading, it’s the process of using a computer to help identify and execute trading opportunities based on a trading strategy that a human trader has programmed it to.

While algorithmic trading may appear reasonably new to many retail traders, they are not new to the financial world. Institutional traders (e.g. hedge funds, family offices, mutual funds) have been using such trading methods for decades ever since computers were around.

Also known as black-box trading, institutional traders create a proprietary trading system that is pre-programmed to help them make buy or sell trades. Of course, such systems are not cheap and typically out of reach for most retail traders – or at least, they used to be.

The good news is that as technology evolves, such algorithmic trading systems are now accessible to retail traders who want to use them. Using platforms like Meta Trader 4 and ProRealTime, retail traders can use algorithms to design their own trading system, back-test these systems based on historical data before implementing them for their trades. Traders can also review and refine their strategies as and when it’s required as market conditions change.

The Rise Of Copy Trading

Another trend that has surged in popularity over the past few years (at least based on the Google trends that we are seeing) is copy trading, also known as mirror trading. Copy trading follows a simple concept. If we believe in the ability of a trader to trade well, then why not copy the trades that our selected traders are making?

While the concept here is relatively straightforward, copy trading has become more prolific as its technology evolves and becomes easier and more accessible to use. Also, for many beginner traders, the idea of simply copying the trades made by someone who is an expert trader sounds like a good idea.

The Risk Of Algorithmic Trading & Copy Trading

When we understand both algorithmic trading and copy trading, it’s easy to be drawn by how seemingly simple these two methods are, particularly for those new to trading. Both methods seem to be ways we can fast-track ourselves to become successful trader.

However, we can’t ignore the risks that both these methods contain. The first is that whether we are using algorithmic trading, copy trading, or just human trading without the use of technology, trading is a high-risk activity. Without the right risk management strategies in place, we could suffer severe losses.

Read Also: Active Trading: 5 Risk Management Habits You Should Adopt To Become A Better Trader

The other thing to remember is that technology serves to support rather than to replace us. With both algorithmic trading and copy trading, we, the human trader, are the ones that decide what our trading strategies ought to be while the computers execute our trades.

While doing that helps take the emotions out of trading, it does not change the fact that if we have poor trading strategies or follow the wrong traders, we will ultimately make losses.

Read Also: 11.11 Sale: 4 Ways To Buy Stocks For Less Than Its Price

Kick-off Your Trading Journey This Chinese New Year

Celebrate the season of prosperity with a chance to win an all-inclusive Premier League finale experience. Plus, score bonuses of up to S$888 when you start trading with IG. Terms and conditions apply.