Trading Made Simple: What Is Algorithmic Trading And How Does It Work?

The following is a guest blog post:

When it comes to trading, many people shy away from diving into this sector because they feel it is overly complicated. Developing a strategic and analytical manner of operating business may be overwhelming and certainly daunting. However, technological advancements and the development of platforms have made the concept of algorithmic trading easier to digest. One marketing expert quoted, “algorithmic trading efficiently increases the universe being traded by an individual trader which is limited in the electronic trading environment.” By eliminating the person-to-person input, algorithmic trading is primarily done through computer simulated formulas that dictate the volume, size, and timing for each trade.

What is Algo Trading?

When a particular stock is unpopular, it straddles the fence between having a stabilized price and small trades. Investors in this stock have been able to reap financial gains from this product in the past. However, with the many competing stocks around, they view this original stock as overpriced. This particular stock is now gaining attention with others investing money, some content with the payoff, and others simply watching it see where it goes. There is an up and down motion with how this stock operates, which makes it unpredictable. When large institutionalized traders begin taking an interest, they may purchase this stock in a large quantity. Because of this, other smaller institutions are unable to see the true movement of the stock.

This unpredictable nature makes it increasingly difficult to know when and where to purchase the stock and at what price. Wouldn’t this process be much simpler with a formulated algorithm that investors could use so as to save time and effort? When using an algo trading option in high-frequency trading, there is a special algorithmic trading what encapsulates position-holding periods, low-latency response times, and daily trading volumes. By exposing trading opportunities through algorithms, investors are able to clearly see the movement of their trade.

A Comprehensive Breakdown

When it comes to algo trading, there are certain duties this “bot” performs. They include:

• Searching through data to find trade signals
• Filling specific orders
• Monitoring the Trades Given
• Repeating the Process After Close

The Different Variations of Algo Trading

We previously discussed the model behind High-Frequency Trading. However, there are other aglo trading methods that investors utilize to be fully engaged in the stock markets flow. Quantitative trading occurs when the program being used utilizes statistical techniques to make the best trading decision. This strategic method leaves less room for mistake compared to if a human were to calculate the formula.

Why is Algo Trading Important

Algorithmic trading is the future of stock exchange. A “bot” that has the formulas needed to perform strategic plans is far more comprehensive than the human mind. This eliminates unnecessary effort and saves time. In fact, 84% of trades utilize algo trading to reach their optimal goals. This eliminates stress and is also environmentally friendly as everything is conducted through technology. You don’t have to rely on guesses, the bot will do that for you. Why not utilize an algo trading platform to assist with your future trading needs?

2 thoughts on “Trading Made Simple: What Is Algorithmic Trading And How Does It Work?

  1. Of course, the problem is finding the right bot with the right algorithm that will suit a trader’s needs. That’s just as elusive (and perhaps as dangerous) as trying to time the market or finding that next stock that’s going to skyrocket. If one is going to use such a bot, it’s probably prudent to start small, but regardless, proceed with caution.

    Although I’ve tried bots in the past, and have failed, I’m sure there is a place for them in the trading world. So, I am by no means discounting their value. Just pointing out that it sounds nice in theory, but can be difficult in practice. Food for thought.
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    • Hi DP,

      Well said. I think many are looking for that ‘magic bullet’ of sorts for trading. The one secret sauce recipe that can consistently produce real returns over time. As you stated, it sounds nice in theory but the reality is often different. Thank you for commenting.

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