How Much Money Do Algorithmic Traders Make? (2024)

In recent times, algorithmic trading systems are becoming widely used in financial trading. It has always been used by institutional traders, but retail traders are also getting involved as they realize the benefits of automating their trading strategies. While the wide patronage may point to the merits of this trading approach, how much do algorithmic traders make?

There is no limit to how much money algorithmic traders can make, but making money from trading, irrespective of the method, is extremely hard. In fact, most traders fail to make money, and some even lose all their trading capital. However, the few who have profitable strategies with some trading edges do make money by creating algorithms that trade for them.

In this post, you will learn the following:

Who algo trader are and what they do
How they make money
How much they can make
Why they can make more money than manual traders
Algorithmic trading tips

Who are algorithmic traders, and what do they do?

Algorithmic traders are traders who automate their trading processes using computer algorithms. They create computer programs that are enabled to know when to enter a trade, when to exit, and how much to buy or sell short, as the case may be. With the instructions coded into the trading algorithms, the computer executes and manages trades on behalf of the trader.

Basically, what algorithmic traders do is to research the market to find strategies with an edge in the markets. The strategies are often very simple to make it easy to code them into algorithms. For example, a trading strategy could be to buy on the third consecutive lower close on the daily timeframe and sell on the second consecutive higher close. Then, the algo trader codes a trading algorithm to execute trades according to the rules of the strategy.

Since algorithmic trading is automated, algorithmic traders often like to run several trading strategies/ algorithms to trade many different markets and timeframes at the same time. With this, they can spread their risk wide and improve their earning potentials.

How do algorithmic traders make money?

Algorithmic traders make money the same way other traders make money — by trading their preferred securities using their preferred strategies. The only difference is that while the traditional traders manually execute their trading strategies, algo traders code computer algorithms that execute and manage their trades in accordance with the instructions built into the algorithms.

Like every other trader, algo traders must have a strategy or a set of strategies they trade. But instead of executing the strategy manually, these traders learn how to create computer algorithms that automate their trading strategies. The algorithms have instructions as to what constitutes a trade setup, the position size per trade, and the conditions for closing the trade.

This automated trading system is tested on the historical price action, and if profitable, it is tested in a real-market environment to be sure that it is robust enough to make money in live trading. If everything ticks well, the trader then launches it to trade for them. So, even before launching the algorithmic trading system, the trader knows its expected performance.

One interesting thing about an algo trading system is that it doesn’t get tired and miss some trades as humans do — it trades all the time and takes all qualifying setups. With multiple trading algorithms, the trader can trade multiple strategies across different markets and timeframes, thereby reducing risk and improving the odds of making money. At the Robust Trader, we trade as many as 100 strategies across different markets at the same time, risking only a portion of our capital on each strategy, which makes it much safer for us.

How much can an algorithmic trader make?

How much an algorithmic trader can make is neither certain nor limited to any amount. While some may not make any money, a few (especially institutional traders) may be making millions, if not billions, of dollars each year. However, a great majority, especially the inexperienced retail traders may lose a significant amount of their trading capital if not all of it.

Taking a deeper look at the question, how much an algorithmic trader can make depends on a lot of factors, but the major one is the trading strategy or strategies used in the trading algorithms. An algo trader needs to have a strategy that has been proven to have a high probability of success and a high positive expectancy to make money. After coding it into a trading algo, the strategy must be backtested using historical price action of up to 10 years and then forward-tested in a real-time market to confirm that it can make money. All things being equal, without any sudden change in the market, a strategy that makes money in backtesting and forward testing has a high chance of making money when used on a live account if there is proper risk management, which is what determines whether a trade can make money or lose everything.

Why algorithmic traders can make more money than manual traders

Algorithmic traders can make more money than traditional traders who manually execute their trades, and here are some of the reasons why:

They know they have the odds in their favor: Algorithmic traders backtest and even forward-test their trading algorithms before using them to trade. So, they know the odds of their trading strategies and can plan their capital allocation and position sizes to maximize their trading edges. Unlike the average traditional trader who guesses a lot about which pattern or indicator combination might work, algo traders use historical market data to evaluate the profitability of their trading edges and even test their algo systems for robustness to be sure that they can work in real-time market before launching them. Thus, they already know the odds of their trades and the expectancy of their algorithmic trading system before launching them.
Computers algorithms don’t take a break: Trading algorithms scan the markets and make trades at all times, as long as the markets are open, which is unlike humans who can’t monitor the markets all the time. This ability is particularly important when trading some markets like gold where there are multiple sessions around the world. For profitable strategies, the more trades, the more money.
There is consistency in trading: It is often difficult for traditional traders who manually execute their trades to adhere to the trading plans, even after creating wonderful strategies and good trading plans. However, algorithmic traders create trading algorithms, which execute their trades according to the instructions in the codes, with accuracy and consistency. Hence, their trades are consistent, preserving their trading edges.
Trading emotions don’t affect execution: Trading, irrespective of the type of trading, is an emotionally draining business. In manually executed trading, trading emotions, such as greed and fear, can get in the way and seriously affect the outcomes. For instance, a trader who just had a streak of losses may struggle with placing the next trade or adhering to his/her trade management rules. Algorithmic traders don’t have much of that — with the computer making the trades, they aren’t involved in the execution of their trading strategies, so their trading emotions have less effect on the outcome of their trades, even though they still experience those emotions and can manifest it if they keep checking their P/L every day.
Trading errors are minimized: Algorithmic traders don’t make those mistakes that are common in manual trading, such as the big finger effect (where you enter trades unknowingly), extra zero effect (where you mistakenly enter a far bigger position size), or poor trade management decision like taking profit early. Their trades are automatically executed and managed by trading algorithms. There may only be a few tech-related glitches — for example, there may be instances when your computer, your internet connection, or the broker messes things up a bit.
Diversification can easily be achieved: It is almost impossible to trade multiple markets and strategies at the same time using the traditional approach. However, with computer programs executing the trades, algorithmic traders can trade multiple markets using different strategies and across different timeframes, all at the same time. For example, it is possible to have many algorithms with different strategies trading gold, crude oil, indexes, and stocks, all at the same time. This diversification across different markets and strategies help to reduce risk — if one or two of these markets behave strangely at one time, the others may be in profit and make up for those losses.

Algorithmic trading tips that can help you

If you wish to become an algorithmic trader, these few algorithmic trading tips may be of immense help to you:

It is better to keep it simple at first: While algorithmic trading makes it easy to trade many markets at the same time, beginner algorithmic traders are advised to start with just one market. The stock market is a nice place to start. When you have created a good system that is making money in the stock market, you can try other markets.
You have to be good in decision-making: Although algorithmic trading is automated, you will be making important decisions, such as the market to trade, the strategies to use, the timeframes to trade on, and many others. Those decisions won’t just be affecting one trade but all the trades your trading algorithm will make, so you have to be careful when making such decisions.
You must establish a risk management plan: Even though algorithmic trading is automated, you must have a robust risk management plan. It is extremely important to determine how much of your account balance you can comfortably risk per trade — about 1% of your account balance is fine as a new trader — and then calculate the dollar value, which you will use to calculate your position size assuming you already know your stop loss estimate. Another important thing is to have a maximum daily loss limit — the level of loss where your trading algorithm would stop trading for the day. Since you won’t like to lose all your funds in one bad day, a maximum daily loss is a good element of risk management. Experienced traders commonly set their daily loss limit at 3% of the account balance or 3 consecutive losses if they are risking 1% per trade.
It’s good to have multiple strategies: While you are running your first strategy, you should create more strategies and algorithms in different categories so that you have different options and not limited to one method or market.
You will need to diversify across markets and timeframes with time: Concentrating all trading capital on one strategy would be too risky as the market can change very fast. To reduce risk, you have to run different strategies in different markets and timeframes simultaneously. However, this should only come when you have gotten enough experience in algo trading so that you don’t overwhelm yourself in the early stages.
You must keep records of your trades: Keeping a record of your trades makes it easy for you to look back and see how your system is performing so that you can address any issues in time. Hence, it is important to have a spreadsheet where your system automatically records all the trades and their outcomes.

(The article is partly written by AI. You find our best content (non-AI) on our website - Quantified Strategies)

FAQ

How do algorithmic traders make money?

Algorithmic traders make money by trading securities using automated strategies. Unlike traditional traders who manually execute strategies, algorithmic traders code computer algorithms to execute trades based on predefined instructions. The algorithms determine trade setups, position sizes, and conditions for trade closure. This automated approach allows for consistent and continuous trading without the limitations of human factors such as fatigue or emotions.

What is the process of testing algorithmic trading systems?

The testing process involves backtesting the algorithm on historical price data to assess its performance. If profitable, the algorithm is then forward-tested in real-market conditions to ensure its robustness. This testing phase confirms whether the algorithm can make money in live trading. The trader launches the algorithm only after verifying its expected performance. Automated systems eliminate human errors and ensure consistent execution of qualifying setups.

How much can an algorithmic trader make, and what factors influence earnings?

The earnings of an algorithmic trader are variable and influenced by factors such as the trading strategy's success rate and positive expectancy. Successful algorithms, when properly backtested and forward-tested, have a higher likelihood of making money in live trading. Additionally, the trader's capital and position size play a significant role. A trader with more substantial capital can trade larger positions, potentially making more money than a trader with smaller capital. Risk management is crucial in determining whether a trade can lead to profits or losses.