Algorithmic trading is a method of executing orders using automated pre-programmed trading instructions accounting for variables such as time, price, and volume. This type of trading attempts to leverage the speed and computational resources of computers relative to human traders. Algorithmic trading is also known as automated trading, black-box trading, or algo-trading. Here are some key concepts and examples of algorithmic trading:

• Trading strategies: Algorithmic trading strategies involve making trading decisions based on pre-set rules that are programmed into a computer. These encompass a variety of trading strategies, some of which are based on formulas and results from mathematical finance, and often rely on specialized software. Common trading strategies include trend-following strategies, arbitrage opportunities, and index fund rebalancing.

• Benefits: Algorithmic trading attempts to strip emotions out of trades, ensures the most efficient execution of a trade, places orders instantaneously, and may lower trading fees. It also encourages an increased focus on data and has decreased emphasis on sell-side research.

• Challenges: A trading algorithm may miss out on trades because the latter doesn’t exhibit any of the signs the algorithm’s been programmed to look for. It can also be challenging to transform the identified strategy into an integrated computerized process that has access to a trading account for placing orders.

• Requirements: To get started with algorithmic trading, you must have computer access, network access, financial market knowledge, and coding capabilities. Implementing the algorithm using a computer program is the final component of algorithmic trading, accompanied by backtesting (trying out the algorithm on historical periods of past stock-market performance to see if using it would have been profitable).

Algorithmic trading is gaining traction with both retail and institutional traders, and a study in 2019 showed that around 92% of trading in the Forex market was performed by trading algorithms rather than humans.