Updated: Jul 13, 2022
Algorithmic trading (also called automated trading, black-box trading, or algo-trading) uses a computer program that follows a defined set of instructions (an algorithm) to place a trade. The trade, in theory, can generate profits at a speed and frequency that is impossible for a human trader.
The defined sets of instructions are based on timing, price, quantity, or any mathematical model. Apart from profit opportunities for the trader, algo-trading renders markets more liquid and trading more systematic by ruling out the impact of human emotions on trading activities.
Algorithmic trading combines computer programming and financial markets to execute trades at precise moments.
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.
Common trading strategies include trend-following strategies, arbitrage opportunities, and index fund rebalancing.
Algorithmic trading is also executed based on trading volume (volume-weighted average price) or the passage of time (time-weighted average price).
To get started with algorithmic trading, you must have computer access, network access, financial market knowledge, and coding capabilities.