In recent years, we’ve become more aware about the role of algorithms in our lives. Algorithms play a crucial role in deciding whether people get a job or a loan, which news they see, even how long and how often traffic lights turn red.
One area where the impact of algorithms can’t be understated is finance. The implementation of these automated processes has lead to a huge shift in the entire industry. And it’s not only the people at Wall Street that can profit from it.
We sat down with an algorithmic trader to learn more about how algorithms are disrupting the financial industry, and why it matters to us all.
Let’s start by talking about your background. How did you become a trader?
From a young age I had a passion for economics, but at college I decided to study computer science instead. After getting my degree, I was thrilled to put my skills to the test. I wanted to find a job that would allow me to best practice and improve upon what I’ve learned. I immediately turned towards the financial industry.
It seemed impossible to find and land a job where I could combine my coding skills with my interest for economics. To stay afloat while on the lookout for the right opportunity, I started to work in the service industry.
After desperate attempts to find the right occupation, I had to give up. There just wasn’t t any job that met my requirements. Therefore, I had to create my own. I spent every waking hour of my early twenties coding an algorithm that can compete on the financial markets. After years of hard work, in January 2021 it was finally ready to be launched. The first version of my Algorithm immediately took off.
How do these algorithms work?
Automated trading systems are given specific rules for how to trade based on entry and exit points. In short, if x buy, if y sell. Since the markets and all players in them are constantly changing, it is important that trading algorithms can keep up. Therefore, the algorithm must be able to adapt to new circumstances and do it fast.
These algorithms are widely used by financial firms across the world. According to the research from Mordor Intelligence, about 60% to 73% of all equity trading in the US is conducted by algorithmic trading accounts. While algorithmic trading systems are mainly used by institutional investors, Hedge Funds and investment banks. My goal was to bring this method of trading to the consumer. With my company FXALCHEMIST I set out to accomplish exactly that.
What advice would you give young people wanting to get into trading?
One of the most critical things to keep in mind when investing is to understand that everything has some risk. Higher returns (in most cases) mean more risk. That’s why you hear you need to have a diversified investment portfolio. That’s so that the profit of a good investment can cover the losses of a bad one. Most inexperienced investors see their investment turns a profit for some time and immediately become greedy. They put all their money on the best performing asset. Sometimes they aren’t even liquidating their profits. Therefore, exposing all their previous profits to the risk of their investment. They think they just have to let their money compound to get wealthy. Sadly, it just does not work that way. You have to be smart to make money in this industry. And the first thing smart people should do is to assess their risk and trying to reduce it.
I think emotions, greed, fear, excitement etc. are the main cause for people starting out to lose their money. We’ve seen in the past how many have lost everything on crypto, because they were unable to stop and reevaluate their risk.
The key to long term success is to have a well diversified portfolio and to keep your profits safe. Don’t take unnecessary risks.
To sum it up, there is no Holy Grail. There are no risk-free investments. Even highly refined and optimized algorithms can fail.