With AI getting more advanced daily, how are everyday traders meant to compete?
When AI models are 1,000s of times smarter than any human, it can seem impossible to compete with them.
AI’s role in algorithmic trading has seen a sharp uptick over the last couple of months. With AI’s like ChatGPT and ClaudeInstant gaining so many new capabilities, their applications are endless.
So what does this newly revolutionized algorithmic trading powered by AI mean for traders? Will it still be possible to profit from the markets or will full-time traders become obsolete?
That’s the question our team at Prop Firm Match who’ve worked with 50+ prop firms are going to answer for you right now.
So without further ado…
Let’s get into it:(Links to scroll to part of the website)
- What is Algorithmic Trading
- What Does It Mean for Yousome text
- How To Profit Off The Algorithms
- What Are The Drawbackssome text
- Errors
- Development & Experience
- Costs
- Should Algorithms Worry You?
- FAQ’s
What is Algorithmic Trading
Well, it’s quite simple.
Computers take millions of pieces of market data and analyze them looking for repeatable patterns in price action, volume, and other metrics.
Once they’ve analyzed these patterns, they start to find common trends using the power of AI to find setups that repeatedly have a high likelihood of providing profitable trades.
And since these computers are now powered with AI, they can do this in a matter of seconds. A strategy an average trader might spend months analyzing and perfecting could be identified and honed down to perfect in a matter of minutes. It’s almost unfair.
The rapid analysis lets computers create algorithms or a set of trading rules which they execute on to predict the markets with extremely high accuracy before anyone else even has a chance to catch on to what’s happening.
There are no emotions or intuition. It’s mechanical trading. Once the parameter’s met, the trade will execute regardless of the other factors present.
What Does It Mean For You?
Algorithmic Trading often leads to traders getting caught in unfavourable positions.
For example, a trader may be used as liquidity. They may enter a breakout in either direction of the market structure, anticipating the price to continue. Unfortunately, the algorithms used by large institutions can manipulate the markets to create fake breakouts.
These fake breakouts typically trap traders in drawdown from an entry at the top or bottom of the market structure.
This can be detrimental to any trader’s portfolio.
But it isn’t all doom and gloom, because there's a way you can use these algorithms to profit off the market. And no, I don’t mean creating or using your own.
How To Profit off the Algorithms
By learning more about how algorithms work and how institutions with large amounts of capital use them to manipulate the markets, you can integrate that knowledge into your trading to make massive profits.
For example, you may identify that when certain market conditions are met, the institutions typically perform market manipulation. You can use this insight to join in with them on the trade.
If you predict that they will fake out the market in one direction, and then proceed to reverse the market in the other direction, you can completely avoid the fake breakout and instead take part in the reversal caused by the algorithms inside institutions.
You’re essentially piggybacking off of the market manipulation the institutions and their algorithms create.
If done correctly, you can make this insight a concrete part of your trading strategy and consistently profit from it given you have proper risk management.
What Are The Drawbacks?
If you’re asking yourself… “Why don’t I join in on the algorithmic trading fun”, let us give you some not-so-great news.
It isn’t all sunshine and rainbows when it comes to algorithms.
They’ve got quite a few glaring problems to deal with, especially for the average trader.
Here’s just a few:
- Errors
- Development
- Costs
Errors
Algorithms are extremely prone to making mistakes. For example, there could be software errors such as errors in the algorithm itself.
Hardware errors can create even more issues, such as faulty or overused parts. This in addition to sometimes faulty market data or sudden spikes in price only adds to it.
Additionally, algorithms might not be able to take into account certain crucial factors when it comes to trading such as market sentiment, subjective analysis, and rapid news decisions.
These factors create a recipe for disaster if not managed with excruciating care.
Development & Experience
If you’re trying to create an algorithm or even run a pre-existing algorithm, it’s not an easy process.
Developing an algorithm can take a beginner months when they’ve got limited experience in the field. The teams behind the major institutions’ algorithms have years of real-world experience not to mention their outstandingly high salaries.
It’s no easy task to build an algorithm that’s consistently profitable by taking into account every single market metric to ensure almost no errors are made.
Costs
Let’s say you decide to engage in algorithmic trading.
Just the setup and running costs can be very high. Usually, the algorithms themselves (assuming you aren’t building your own) cost hundreds to thousands of dollars to purchase.
On top of this, the computers required to run it as well as the software needed to run the algorithms can cost hundreds of dollars a month.
Should Algorithms Worry You?
In most cases, there’s no reason to worry.
The regulations put into place by governments and markets make it extremely hard for algorithms to realistically take over trading.
When considering factors like market sentiment, news, and intuition, there’s no world where an algorithm can consistently beat traders.
There’s always a way for both traders and algorithms to adapt to each other within the markets and find a way to exploit the other.
Instead of being afraid of algorithms, try and find ways to take advantage of the situation and see how they can play into your strategy..
Algorithmic Trading in Prop Firms FAQs
Are proprietary trading firms the same as hedge funds?
No, proprietary trading firms trade their capital, while hedge funds typically manage money on behalf of clients.
Can individual traders engage in algorithmic trading?
Yes, individual traders can develop and deploy their algorithmic trading strategies using online platforms and software tools.
How do prop firms recruit algorithmic traders?
Proprietary trading firms often recruit algorithmic traders through internships, university partnerships, and online job postings.
Are there risks associated with algorithmic trading?
Yes, algorithmic trading carries risks, including technology failures, market volatility, and regulatory compliance issues.
What is the difference between algorithmic trading and high-frequency trading?
Algorithmic trading refers to any trading strategy that relies on algorithms, while high-frequency trading specifically involves executing a large number of trades at high speeds.
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