Image: computer monitor
showing trading software
What is trading software?
It is a written trading rules and instructions that a computer in preference to
a person executes to fill high volume buy and sell orders at an extraordinary
hedge funds, brokerage or high frequency trading firms and mutual
(or pension) funds exploit to trade
stocks, currencies and commodities.
Two fundamental objectives
Every trading program or algorithm has two essential functions:
2/ and competition.
The race to execute, manage and detect greatest trading opportunities
(contrary to the human beings’ sluggishness) has pushed big financial
firms to rely on a new range of extremely sophisticated automated trading
equipment. The ultimate purpose is to trash the opponents or any other
competitors and to maximize gains.
This method of trading is also called speed trading, but it is commonly
known as High Frequency Trading (HFT).
High frequency trading firms rely on:
- the speed to access high impact economic news before the general public,
- speed to take advantage of bullish or bearish trades,
- speed to secure gains,
- speed to profit from price discrepancies in real times,
- and speed to analyze social and markets mood from social websites
such us Google Plus, Twitter and Facebook.
It follows that, to be the first, one must contend with others and surpass
The race to supersede is excruciating and men or women are more inefficient
than a trading algorithm.
The bottom line in trading
The end product in trading is profit. Whether one can trade like God or
employ Elliott wave theory like an eagle, the acid test is all about how much
profit one has made. Therefore, it is crucial to employ the most excellent
technologies to identify the best times one should buy, sell or hold.
Furthermore, it is also vital to buy or sell at the most acceptable price. It is not
sufficient to recognize a trading prospect, but to know what the fair price one
should pay is. Faced with these challenges, human beings could not compete
with high speed trading computers that are executing complex algorithm in
a split of a second.
Two types of trading algorithm
1/ algorithm for technical trading,
2/ and algorithm for decisive financial data or news.
Technical trading programs are more sophisticated electronic scalping tools
that execute millions of real time trades on the ten seconds, one, and two
up to ten minutes time frames. Several of these trades last only few seconds.
Their ambition is to “cream the market consistently” (in the proper sense),
and to secure millions of tiny profits at an extraordinary speed. Technical
the RSI indicator play a leading role in these trading programs.
Though, technical trading software generate substantial gain for the
quantitative trading firms, they also create a cumulative market distortion
which can lead to a sharp market correction.
To Know more about technical algorithm trading strategies visit here.
The second type of trading applications seeks to access high impact news or
key economic data before all competitors. It takes advantage of few
milliseconds delays when data is pushed through cables from one city to the other.
Consequently, many speed trading firms have installed their offices near major
stock exchanges to reduce the time delays. This gives them the privilege to be
the first to access major economic news such the ADP or Non Farm.
When the competition became intolerable, a fairer infrastructure
(without discrimination) has been put into place by the exchanges.
Here is athat explains all.
The rivalry was more dangerous among these HFT firms than it was
among traders on the trading floor in Chicago or New York. The current
scenario is similar to the American film Wild Wild West. Though, no
blood has been spilled, their ramifications if they are not properly
handled can destroy wealth or even enslave many.
1/ Computerized trading software can send phony or dubious buy or
sell orders into the market in real times for the sole purpose to trap
competitors and level 2 traders.
2/ Millions of sell or buy orders can be cancelled in few seconds
leaving other market participants with losses.
3/ Warfare style mind games or real time trading psychology tactics
are frequent on all major social websites. Proprietary trading software
are deployed to gather vital
financial data from social posts, and gauge the market environment
at any time.
4/ Quite often, long term investors see their investment portfolios
swing up and down at a frenetic speed.
5/ Market places such as New York or London are now an open battlefield
for top rated computerized mind games. No cost is too small when it comes
to upgrading trading technologies. More robust trading computers and
finest brains both in the technology and financial fields are working
round the clock to supersede others.
6/ Regular speculators or scalpers and liquidity traders are fleeing
At the forefront of the trading game are the smartest market
participants who always pay heed to others. They seek to go into their
minds in view to predict their next move.
However, apart from the mind games, a real computerized trading
game has intensified since 2009. The opening bell mainly in New
York and London signals the start of the most rewarding and entertaining
computer game ever played by addicted gamer in South Korea.
Image: South Koreans
playing computer game
Though, young south Koreans played all night long, but may be
exhausted at the end, trading algorithms do not get weary. Round
the clock, they execute orders then compete with other trading
firms. They recognize how human beings (individual day or
swing traders) trade. They can easily trap or trick them. They
are prompt, robust and unfeeling. They are also active gathering
valuable financial data that serve to build more robust trading
programs. Though they assist, they do not get pay, but they
enhance speed trading firms.
In addition, regular traders and general investors who grow to
be accustomed to these new market players make a complaint, and
call for their curtailment. Some try to understand how these machines
work, and how they can limit them. Many traditional scalping or
investment strategies that helped before become obsolete. The
competition is real to all day traders, scalpers, investors, speculators,
short, medium and long term market players. Earlier rules have changed.
The market is more volatile than before. Some traders have left, some
have changed their trading style to adapt to the new game. Social
websites have also noted a substantial rise
in the number of posts hash tag HFT or algorithm trading. Many content
creators on YouTube posted various educational videos about this
phenomenon in the financial markets. Angry investors contacted
the SEC, and politicians to express their fear. The trading game is
not only played on the trading computers screens, but also on
mainstream media such as the television, major news papers and
the political arena.
The biggest losers
The biggest losers are long term investors who sold out their holdings
to prevent further losses after wild swings in the financial markets
(only to notice the next minute, hour or day that stocks have quickly
recovered all their losses). The draw down is not only financial, but
also psychological because they will kick and blame themselves for
being too reactive. They may live the rest of their life leaking their
wounds and cursing the markets.
The biggest question
Image: Big question mark
Should governments prohibit high frequency trading or any form of
The right answer is no, but effective rules must be set to restrain
several Wild Wild West
trading machines. The majority of these trading algorithms do not
adhere to the trading triangle, core market principles and patterns.
Therefore, they infringe them and create dangerous price distortions.
The flash crash in May 2010 is a reminder that machines can fail.
They may destroy more wealth than the humble short sellers that
have been banned in some countries.
On May 6 2010, Dow Jones Industrial Average (DJIA) has lost 800
points within half an hour.
This time it was not the blameless short sellers, but a new breed of
trading applications. One should recall that in 2008 during the
financial crisis, short sellers were wrongly vilified for being the
real cause. Most regular investors applauded when France and
other countries outlaw short sellers. These investors could not
comprehend why Dow could crash so fast and low on a day when
the market was bullish. This was a wake up call.
Furthermore, investment firms were inundated by telephone
calls from distressed clients who want answers.
Why a market that was rising suddenly gave up so fast all
On social websites, all fingers were pointing to the aggressive
algorithm trading firms. Meanwhile, investors who wanted
peaceful sleep called for a total ban of high frequency or quantitative
Theoretically, trading software, algorithm or any automated proprietary
trading tools built by computer engineers who do not grasp basic market
Indeed, if a market is distorted, it will rectify itself unless it is suppressed
to a certain degree. Market corrections are vital parts of market cycles
but sharp corrections (usually painful and abrupt) come from overdue and
Though, one should not stop these trading software or firms, they ought to
pay heed to other market participants. They could do their uttermost to
develop friendlier algorithm that adhere to basic market patterns and
principles. The future will tell if human beings cause worse market
crashes than these trading programs or if these machines can help
prevent vicious sharp corrections.
Surely, no one should tamper with market ups and downs. Markets
do not always rise, there are harvest times (bearish seasons) when
assets become inexpensive and wealth changes hands. Consequently,
one ought to implement both bullish and bearish trading strategies.
Delight in the sweet and sour of the stock market by learning how to sell
when it is time to sell instead of being an eternal bull.