Know more about algorithmic trading systems!
This type of trading is also known as automated trading, black-box trading, or algo-trading.
Algorithmic trading is an order execution method that makes use of a computer program comprising a defined set of instructions, known as algorithms, to place a trade. These algorithms can be programmed by using variables such as time, price, volume, or a mathematical model.
This type of trading is also known as automated trading, black-box trading, or algo-trading. Algorithmic trading tries to capitalize on the speed and flexibility of automated pre-programmed trading instructions, giving it an edge over manual trading.
Some examples of algorithmic trading strategies are
- Trend-following Strategies
- Arbitrage Opportunities
- Market making,
- Inter-market spreading
- Position Sizing
- Stop Loss Modification
Most of the algorithmic trading strategies fall under the category of high-frequency trading (HFT), which are marked by high turnover and high order-to-trade ratios.
Advantages of using algorithmic trading are
- Timely execution at best possible prices
- Instant execution upon fulfillment of instructed conditions
- No chance of manual error since process is automated
- Reduced chance of losses otherwise caused due to behavioral biases on individuals
Algorithmic trading is widely used by investors and traders. It is also used by entities such as investment banks, pension funds, mutual funds, and hedge funds while making stock purchases in huge quantities so as to not influence stock prices with discrete, large-volume investments.
The pre-requisites for algorithmic trading are
- A trading software
- High speed network connectivity
- Access to trading platform
- Access to live market data
Moreover, the system needs to be tested using historical data to ensure that the algorithms are working properly. With these requirements in place, algorithm trading can be implemented.