Types of Trading

Monday, October 15, 2018

When you’re considering taking your business at home to the next level, you can often get ground down by the daunting tasks ahead. Trading can seem especially intimidating if you don’t understand the terminology, or have a clear vision for your what your business requires. There are various types of system development trading to contemplate when expanding your business.

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Algorithmic trading
Simply put, an Algorithm is a set of instructions. Algorithmic trading, often known as algo-trading) is where computer systems are programmed to comply with a specific set of instructions for trade, to produce profits faster and more efficiently than any possible human trader. By removing humans from the trading process, it removes the margin of human error and judgment and makes markets more liquid. Algorithmic trading is based on rules; mathematical model, price, timing, and quantity. A computer can be programmed with an algorithm - for example, to buy shares of the stock when its 50-day moving average goes below the previously set moving average - and it from then, no human interaction is needed. The algorithmic trading software will do the rest for you. There are many benefits of algorithmic trading. It is cost effective (best price trades, decreased transaction costs, etc), precise and can make concurrent automated checks on various market conditions.

Discretionary trading
Discretionary trading is quite the contrary to the above, using human discernment and decisions to enter and exit trades rather than being automated. This is usually a decision made on the basis of the current market conditions. Discretionary trading is not easy; you must have certain qualities to demonstrate the confidence to see a trade through. A discretionary trader will still work with systems for security of the deal. There are plenty of positives to this kind of trading. Human analysis is often required to pick out and consider the lousy context in trades, where perhaps a system may highlight an impressive looking deal. However, using intuition to make arrangements does not always sit right with traders, and so algo-trading is often the preferred method.

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Hybrid trading
Hybrid trading, as the name implies, is simply (or not!) a combination of both algorithmic trading and discretionary trading. Effectively, instructions are entered into an automated system, but ‘exits’ are made optional to the trader. The trade may be bound by several rules; however the trader has the option to override the system. The benefits (a negative for some, maybe) of this are that you the trader, can still have input and make decisions. Hybrid trading gives traders a choice between traditional discretionary trading, and the more modern, faster automated algo system.

All in all, when looking to expand your business, there is much to consider. Not only the likes of trading, finances, software/systems, and changes to the market; but also ensuring that your business is ready for anything. Problems may arise at any given time - the key ingredient to a successful business is to be prepared.

These are the three main types of trading. Determining which is right for you, as a trader, and your business is, in itself, discretionary.

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