PostHeaderIcon Minimizing Losses Due To Program Trading Glitches

shutterstock_2599996Program trading has become more common because it allows traders to react faster and take advantage of opportunities quicker than the others. Program trading is largely seen as a convenient tool to use for today’s quicker trading environment.

Despite the advantages of program trading, there are certain disadvantages that new traders should be aware about. Since program trading relies on technology and software programs to analyze market movement and daily trades, there is the risk of experiencing glitches. Using a faulty algorithm in the program can sometime cause a costly movement that might affect the market. And since it is mostly automated, it may also lead to erroneous trading action based on the faulty algorithms that may send the wrong signals to other program traders.

In a worst case scenario, a collective effort from different program traders acting upon a faulty trading algorithm or command may cause a domino effect and lead to a market meltdown. The actions can sometimes be too quick to remedy. In order to help protect you from certain program trading glitches, here are some things that you can do to minimize possible losses.

Resist temptation to ride on unusual market volatility.

Market volatility provides traders with a means of getting bigger profits. But it can be a risky endeavor since the market may work against you. Try to avoid being tempted to ride the wave of market volatility, especially if it is an unusual or puzzling one. For all you know, it may be caused by program trading glitches in the market. Once the market corrects itself, you might find yourself being on the wrong end of the stick.

Consider using limit orders instead of market orders.

A limit order is a type of order wherein a brokerage is instructed to buy or sell shares at a specified price. On the other hand, a market order is an order placed instructing a brokerage to sell or buy shares immediately at the best available price. A market order does not contain restrictions and may be carried out when a market is volatile. A limit order on the other hand provides a way for an investor or trader to be protected against unusual market volatility to a certain degree.

Use stop limit orders instead of plain stop orders.

Just like the difference of the limit order from the market order, a stop limit order provides traders with a higher level of control on how orders should be filled. The order may not be guaranteed unless the specified price is reached. A stop order is a type of order to buy or sell shares once a set price is reached and is filled in at the current market price. Although immediately executable, the order is usually filled only after the set price is reached. The difference between the stop price and the market price can sometime be quite large in fast moving markets. But in the case of a stop limit order, there is a ceiling where shares can be bought or sold. Once a stop price is reached, the stop limit order becomes a limit order where there is a specified price to buy or sell shares. If the market price goes over the specified price, the order will not be filled.


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