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Can Private Investors Compete With Algorithmic Trading?


With the dawn of the decade, algorithm based trading of securities, commonly known as algorithmic-trading or short algo-trading, has become more and more popular. Big hedge funds and leading investment banks are using algorithmic trading to improve their investing performance on the stock, currency and commodity markets and are investing huge amounts of money into the development of high performance computers and related programs.

So what consequences does algorithmic trading have for the private investor?

There is no way to avoid the conclusion that private investors can hardly compete with the superior technical strength of big financial companies. The fact also gives away a strong line that private investors can not make money from using early financial information. They can only try to exploit the weak points of algorithmic trading programs in order to be successful on the stock markets.

The weak points of algorithmic trading and how to use them

First of all, it’s important to remember that the majority of algorithmic trading transactions have an average position holding time of seconds or minutes. There are only a few automated strategies define a holding time of a day or more. This is, after all, mostly unnecessary, because most of these strategies are based upon using an information advantage, rather than economic or corporate development.

John York of algotraders.com takes a deep look and quotes that the point at which private investors can step in and outmaneuver the technical superiority of the algorithmic trading programs. The investor must focus his trading strategies in such a way that they are independent of short-term information or quote development, but rather are based on mid-term corporate development.

One should understand that as soon as the holding period of an investment is moved to weeks or months, the private investor is no longer confronting algorithmic trading programs head on, but moving freely in market-areas on which they have no influence.

The reason for this is that the data analyzed in algorithmic trading says nothing about the mid- or long-term development of a stock position. The ask/bid positions within the order book of a stock, for example, contains no information about the current valuation of the company or future market opportunities.

This doesn’t mean that private investors cannot use technical stock analysis data to determine the right timing to open a position too, but the major criteria should nonetheless always be the financial values of the underlying company. The following figures are always worth keeping an eye on: development of corporate revenue as well as earnings and cash flow in comparison with its nearest peers. Other values worthy of note are: the price/earnings ratio, the debt ratio and the revenue/earnings ratio. It can be a great asset if investors combine various such corporate values to define investing goals, they will be able to select appropriate candidates from the huge range of stocks on the market; but this is an almost impossible task without some kind of support tool.

But is strategy-based stock analysis not another kind of algorithmic trading?

The big players are ofcourse looking to beat other market participants in this area too, but they cannot achieve advantages as easily due to the fact that these strategies are based on data available to the public.

Algotraders.com a pioneer in the algorithmic trading uses the algorithmic system to trade. The firm is also involved in fund management for its client through automated trading systems. One can start trading with the algotraders.com by clicking on the below link:

Manage your fund with algotraders.com

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