Algorithmic trading, also known as algo trading, is a method of executing trades using automated pre-programmed trading instructions that account for variables such as time, price, and volume. It is a fully automated process that uses advanced coding and mathematical models to make trading decisions. Algo trading attempts to leverage the speed and computational resources of computers to generate profits at a speed and frequency that is impossible for a human trader.
Some key features of algo trading include:
- Best Execution: Trades are often executed at the best possible prices.
- Low Latency: Trade order placement is instant and accurate, and trades are timed correctly and instantly to avoid significant price changes.
- Reduced transaction costs: Algo trading can reduce transaction costs by eliminating the need for human intervention.
- Simultaneous automated checks on multiple market conditions: Algo trading can monitor multiple metrics simultaneously, which can help traders make more informed decisions.
Algo trading is used in many forms of trading and investment activities, including mid- to long-term investors, short-term traders, and sell-side participants. It is widely used in scalping, which involves rapid purchasing and selling of assets to earn quick profits out of small increments at the prices.
There are different types of algorithmic trading strategies, some of which are based on formulas and results from mathematical finance, and often rely on specialized software. Moving average trading algorithms are very popular and extremely easy to implement. The first strategy that drives algo trading is trend identification, which helps analyze market trends depending on the price, support, resistance, volume, and other factors influencing investment decisions. Mean reversion is another popular strategy that involves identifying assets that are overbought or oversold and then trading them when they return to their average price.
In summary, algo trading is a fully automated process that uses advanced coding and mathematical models to make trading decisions. It provides several advantages, including best execution, low latency, reduced transaction costs, and simultaneous automated checks on multiple market conditions. It is used in many forms of trading and investment activities and is widely used in scalping, trend identification, and mean reversion strategies.
