What is Algorithmic Trading?
Algorithmic trading uses a computer program that follows a defined set of instructions (an algorithm) to place a trade. The trade, in theory, can generate profits at a speed and frequency that is impossible for a human trader.
With algorithmic trading, computer programs take into account variables, such as time, price, and volume, and attempt to leverage the speed and computational resources of computers to your advantage, relative to the speed in which a human trader can operate.
In action, this looks like sending small portions of the full trade order to the market over time. You might also hear this referred to as “automated trading,” “algo trading” or “black box trading.”
Generally, the idea is that computers are faster and more precise than humans, and computers’ lack of emotions ensures unemotional trading. If you wanted to get involved and use algo trading, you’d need a good understanding of the financial market and the coding skills, or the money to pay for coding skills, needed to create your own algorithmic trading programing. Naturally, this means algo trading is less than accessible to the average farmer or rancher.
Large hedge fund owners do have capital needed to create trading algorithms, and in doing so, they create algorithms that looks for market patterns, such as resistance and support within the chart structure, and create automatic sell or buy triggers based on resistance levels and/or volume in the market, taking traditionally big positions, which drives the market down. With AI and computer programming, this can trigger other algorithms to follow suit, further driving the market.
Pros of using algorithmic trading: these computer programs can act faster and be more precise than a human; the computer programs are neutral, removing all emotions from trading.
Cons of using algorithmic trading: these programs can only look at technical data. There are no fundamentals or historical strategy and understanding of the market patterns at play; The data is only as good as the programmer. And that data is proprietary, which means the average producer doesn’t have access to or capital enough to get into the game of algorithmic trading.
Since creation, this market tool has always been just out of reach for ag producers, but now there are some companies who are making it more accessible.
Go Farm Yourself was created specifically to spit out buy and sell alerts for farmers to use to market their grain. While I don’t personally know the programmers or what their proprietary formula is for their algorithm, whose name is “Ginger,” I do know this program was specifically designed with farmers in mind.
When working with clients, aka “my guys,” we work to identify big sales volumes which could be the algos pushing the markets, and we can layer this with ongoing conversations about removing emotional decision-making as we now have more knowledge to drive our decisions.
Go Farm Yourself could be a tool I look to utilize in the future, as algo trading is such a big mover in the market now, and I expect its influence will only get deeper.
