Why Do It?

People are attracted to algorithmic trading for a number of reasons, including the following.

• Back-tests can be performed. In other words, one can simulate the algorithm as it would have performed on data in the past. This makes it possible to develop strategies that would have performed well in the past, and then one can hope that they will continue to perform well in the future. This is simply not possible with discretionary trading.
• Speed is good. Computers can perform computations and place orders extremely quickly. A trading algorithm running on a decent computer can react to changing situations in milliseconds, while human traders cannot even move their fingers to the keys that quickly, let alone make a decision in that time.
• Algorithms have no emotions. Novice traders lose a lot of money because of their emotions (see the many books devoted to the topic of trading psychology). One classic response is to panic and sell something when the price drops rapidly. Sometimes this is the right thing to do and sometimes it's the wrong thing to do. But fear alone should never be a reason to sell. An algorithm will never make this decision because of fear.
• Most strategies are easily scalable.  If you can make $50000 a year using algorithm trading, it is (theoretically) a simple matter of doubling all your order sizes to make $100000 a year instead.  Of course, your losses within the year will be doubled as well, and increasing order sizes beyond a certain point can lead to deterioration in performance due to market impact.  But the concept of a "volume control" for your own salary is very attractive.  Of course, unlike other jobs, trading earns income that is random, and may even be negative.  Good traders manage their risk by choosing their scale carefully.  You want the probability of losing all of your trading capital in the first month to be very low.

If things are going well with algorithmic trading, one could obtain cumulative profit over time that looks something like the following.  In this particular case I am showing a small portion of my own P&L (profits and losses)  over successive trades in my personal trading account using my own home-built infrastructure.

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