Algorithm-based trading no doubt provides one of the best automated trading solutions for traders to execute trades with different types of strategies as per the market conditions. Algo trading software is capable of performing multiple transactions using pre-defined strategies with the option to choose, create or customise own strategies as per the risk profile and reward expectations.

And nowadays most of the institutional traders, including retail investors and regular traders, are also using the Algo trading to trade in different market segments. Using such advanced trading software, you should have specific knowledge and skills with various other technical aspects to avoid mistakes. Many traders ignore such mistakes, resulting not being able to efficiently utilise the power of Algo.

Moreover, you will also not get the desired results or may incur unexpected losses when trading with Algo. In this respect, we bought a few important things that you need to consider to avoid mistakes while trading with any algorithm-based trading software or application.

Top 10 Mistakes to Avoid in With Algo Trading:

1.Creating Highly Complex Strategies

In Algo, you can already find pre-defined strategies designed for different market conditions and according to the trading goals of the traders. And there is an option to create your own strategy or customise the existing one, but many traders try to create highly complex strategies using multiple technical indicators and other conditions. Over-complicated strategies often lead to overfitting, resulting in the failure of the strategies.

The highly complicated strategies sometimes work with the historical data, but in a live market, they would not be suitable, as there are various factors that affect the market movement. You need to understand the market structure and the current situation of the market to create the strategy accordingly.

2. Avoiding or Ignoring the Backtesting

Backtesting in Algo trading is one of the most important features that traders avoid or think is a waste of time. This could be one of the biggest mistakes while trading with Algo. Backtesting is the process of testing the performance of Algo trading software and its various strategies using historical data.

Backtesting gives you a chance to check the performance of the Algo in the various market conditions, and based on these results, you can tweak the parameters in the strategy or optimise the strategy as per your desired results. Apart from using the historical market data, you should also backtest your Algo in a live market to know its capability and optimise the Algo as per the changing market conditions.

3. Over-Optimisation of the Strategies

Optimisation is good to tweak your Algo trading strategy as per the changing market conditions or as per your risk tolerance and reward expectations. However, over-optimisation of the strategy will make your Algo lead to curve fitting that may affect the speed and execution efficiency of the Algo.

An optimised strategy can work with historical data, but might fail in the live market or unexpected market conditions. Hence, adding unnecessary rules, tuning the key parameters and tuning the irrelevant parameters can disturb the performance of the Algo in the real-life market.

4. Neglecting Slippage & Transaction Cost

In Algo trading, slippage is the difference between the price quoted by the automated system and the actual price at which your ordered transaction takes place.In fact, executing your strategy at the exact price is quite challenging, even impossible in volatile market conditions. And when you trade with Algo, and ignore the slippage, it can cost you in terms of profitability with less margin.

Also Read: How to Reduce Slippage in Algo Trading: Tips to Avoid Slippage

Similarly, you should also check the cost of transaction while trading with an algo, as apart from basic brokerage charges, there are certain other charges, GST/SST, stamp duty, and cost of slippage. Ignoring such charges or transaction costs will not only affect your profitability, but also reduce your margins.

5. Ignoring the Current Market Condition

This rule not only applies in the manual or traditional-based trading system, but while trading with Algo, you need to consider the current market conditions. Based on the trend and market situation, you should choose the right trading strategy or adjust your strategy to get the best results.

Algo users sometimes make mistakes and have a misconception that Algo trading software can automatically choose the right strategy or adjust the strategy as per the current market conditions. You need to avoid such mistakes and set your Algo to trade with the best suitable strategy as per the current market conditions. As there could be unexpected situations, Algo might not be aware of.

6. Lack of Human Insight & Real-Time Monitoring

This is another blundering mistake that traders do while trading with Algo. Although, it is an automated trading software can manage various tasks automatically, where no manual handling required. But ignoring the human oversight in Algo, trading possesses the risk of unanticipated losses. Especially when the market does not move as per your expectations or unexpected changes occur in the trend.

Similarly, leaving your Algo totally on the system is not sustainable; you need to keep monitoring your trade positions and other factors that are not in the control of the Algo. Humans with their psychological mind can sense certain coming situations that would not be possible for Algo. It gets data or certain inputs to get the signal, and then sends it to the automated system to take appropriate action in a timely manner.

7. Lack of Understanding of the Algorithms

Understandingthevarious aspects of the Algo trading is important to apply its various functions and key features so that you utilise its full potential with the best efficiency. Many traders are not aware of Algo trading features, key functions and the level of complexities or how it exactly works. This kind of incomplete knowledge and understanding of Algo leads to inefficiency in trading.

Also Read: What are the Hidden Features of AlgoTest in Trade Radar

Before you start trading with Algo, get the complete knowledge and understand its various functions, like how to select, create and deploy the trading strategy. How to backtest and optimise the strategy or adjust the various parameters to tune the strategy as per your risk profile and trading goals. You can consult with an Algo expert or read the various tutorial articles on the Algo trading applications.

8. Pay No Attention to Risk Management

Traders overlooking the risk management in trading, whether it’s manual or algorithm-based trading, are making one of the biggest mistakes in trading. The market possesses various types of risks; you need to be very careful to avoid such risks or minimise the impact in uncertain market conditions.

While activating your trading strategy in the Algo, make sure risk management strategies like stop-loss orders, position sizing, and exposure limits areenabled to protect your trade position. Apart from that, diversifying your trades and regular reassessment of risk factors are important to make sure that risk management strategies are capable of dealing with various unexpected market conditions.

9. Use of Overleveraging in the Trading

Margin trading allows traders to trade with high-value trades with low capital, providing the leverage to enhance the potential of returns on their investment. However, overleveraging of such a facility in trading can result in significant losses in the trades or an increase in the cost of transactions.

And nowadays, advanced Algo trading software might misuse the leverage that can cost you in terms of paying the high interest charges or unexpected losses in highly volatile market conditions. Hence, make sure your Algo is backtested to utilise the leveraging optimally as per the favourable market conditions.

Also Read: How to Trade in High Volatile Market: Best Trading Strategies

10. Using the Wrong AlgoTrading Platforms

This might be an unintentional mistake, or you can say it might occur due to a lack of accessibility or being unable to afford the resources or being unable to get the right platform to trade with the best Algo trading software. You need to choose the right Algo trading platform allowing to trade with wide-ranging strategies while giving you the best results in various market conditions.

While choosing the Algo trading platform, check the execution speed, integration of order management, backtesting, accuracy, strategy builder, technical indicators, risk management and other essential features. Moreover, the Algo trading platform should allow trading in the various market segments and capable of working efficiently in all types of market conditions, giving satisfying results.

Also Read: What are the Best Technical Indicators for Algo Trading

Final Words

Algo trading software, no doubt, can provide you with an automated trading solution with the capability to trade with highly complex trading strategies as per your risk appetite and investment goals. But at the same time, while using the Algo in your trading practice, you need to consider the various key points like avoiding over-optimisation, don’t ignore the backtesting, market conditions and risk management.

Furthermore, before using the Algo efficiently, you should have the proper understanding and knowledge of operating or using such highly complex trading software. And despite the autonomy of trading in Algo, keep monitoring your trade positions using human insight. Last but not least, pick the best Algo trading platforms to get the best results, maximising your chances of profitability and limiting the losses.