Auto trading vs. Algo trading – Main Differences and Common Ground

Over the past couple of years, trading as a form of investment strategy has come more into the limelight and is now very common globally. This has birthed many different types of trading, but two specifically, algorithmic and automated, are the two in review today.

Algorithmic, known as Algo trading, Copy trading, and Automated trading, which you may have heard referred to as an auto trading bot, are among the most widely known strategies in trading. Although the conception of these by the public is similar, they are quite different from each other. This article will shed more light on algorithmic and automated trading, their similarities, and what makes them different.

Algorithmic Trading

Algorithmic trading goes by many names, such as algo-trading, automated trading, and black-box trading. As its name suggests, this type of trading executes based on algorithms. These algorithms are pre-programmed variables such as time, price, and volume to set instructions during trades. These instructions place orders in small portions, accounting for orders too big to place at once. The bit-by-bit orders sent help to get a reasonable price at a particular time, and it also helps during aggressive trading.

Also, there are models created by using well-defined rules and formulas. These models are what set instructions to select entry and exit points. Algo trading relies on both computer programming and financial markets to carry out its trade and does not give space for human emotion to have an impact.

Unlike manual trading, Algo trading helps to trade at the most favorable prices. This is because it executes trades with efficient accuracy and better precision, and the rate at which transactions are conducted is significantly increased. Most importantly, traders no longer have to place trades or be present manually; they do not need to watch the market with immediate attention, which gives them time to attend to other things.

The major disadvantage of this trading method is that they give up control of their account to another party other than themselves. Although human attention is significantly reduced, there is still a need to check constantly to ensure everything is running smoothly and as planned. This includes ensuring there were no connectivity issues with your internet, which may have disrupted and hautled the program.

Automated Trading

This is also known as Expert advisor (EA) or robotics trading. Automated trading involves using automated software run on a system to execute trades. These trades are carried out using the parameters that the software was made with. Traditionally, to carry out automated trading, you

had to know how to trade and have good programming knowledge, but the process has since been simplified.

Auto trading is based on a strategy that has to be simple enough to be made into programmable rules. The more complex this strategy is, the less effective the program becomes. The trader can determine their order type, when and what should trigger the order, or use the software’s default setting.

Automated trading helps to control one’s emotions while trading. Your idea can be tested on previous data before automating the software and putting your money at risk. It also helps to trade with discipline as you must follow the plan.

Like Algo trading, Automated trading’s one main trait shared in common is that it relies solely on technology, and any disruption in either the program, connectivity, or hardware issues can disrupt the entire trading process, commonly resulting in requiring human input to re-deploy said software.

Also, in the event that the trader discovers a particular strategy cannot work or if it needs to be tweaked, the trader must halt trading and, if allowed, make the necessary adjustments, then redeploy the program.

For instance, if the user identifies an action in the strategy they want to change, such as automatically buying once the RSI hits 15 instead of 20, they would have halted the trading, make the edits, and then re-initiate the process.

Similarities between Auto trading and Algo trading

Automated and algorithmic trading share many common grounds. They both need to be programmed to function and some pre-programmed variables to work. These programs both set out laid down rules for the trade to follow.

They also share similar benefits in common. They both help to put aside emotions while trading; they help to trade at optimal prices and help to generate income when well programmed. They execute trades with no human error, with so much accuracy and precision, following the rules already developed. They also do not require the traders’ full attention as the trader does not have to sit with the trade.

While complex in technical nature, their processes have both been streamlined over time.

Main Difference between Algo Trading and Auto Trading

Algo trade is algorithmic; it reads the data and decides on the work, compared to auto trade, where everything is determined before and automated. Algo trading is also connected to high-frequency trading or placing trades at lightning speeds. This provides traders the edge in certain strategies such as arbitrage trading, where they’re able to capitalize on the slightest difference in prices.

Auto trading needs simple strategies made into programmable orders, and Algo trading requires bit-by-bit orders to substitute for the big ones.

Automated trading occurs automatically; the decision to buy and sell happens automatically using the programmed software. The entire trading process is automated from the beginning to the end. But, Algo trading is used to increase speed and reduce transaction costs when trading in large volumes. In other words, Algo trading is used when the models implemented know when to enter and exit a trade.

Takeaway

In summary, the use of programmed codes and software to trade is rising, and learning the difference between the two most popular methods will surely be valuable to anyone who foresees themselves being a part of this space in the future.

Algo and auto trading share both similarities and differences, but in the end, they are both tools to help traders. You can decide on the strategy which is best for you and your goals but with everything, doing your research, due diligence, and taking your time to make a decision is always a wise choice.

Also, don’t feel like you have to stick with a particular method once selected.