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Why Algo Trading Works.

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.


KEY TAKEAWAYS

  • 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.



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