Definition: Algorithmic Trading involves entering data into a trading system in an exact way to give an advantage to a trader. Algorithmic traders execute trades using sophisticated software programs made by software engineers based on complex mathematical equations. Their ability to analyze and simulate market conditions quickly enabled them to profit significantly from market moves before other traders had a chance to take advantage.
Algorithmic Trading involves solving a problem involving numbers and selecting a number from a global pool of numbers or entering a formula into a calculator to determine the value of an unknown quantity. Algorithms carry out mathematical computations. In essence, an algorithmic trader purchases securities using the money that he receives from selling other securities (this can include stocks, bonds, futures contracts, ETPs, etc.) and then uses the resulting profit to buy more.
Algorithmic Trading involves a highly educated guess as to what the market will do next. It relies on large amounts of data and scientific analysis to determine how much a particular asset cost will be each day and whether those costs will be profitable over time. Additionally, algorithmic traders are often required to maintain a certain level of client service or risk management capabilities due to the nature of the business.
An algorithmic trader does not follow any set process or set rules; instead, they use statistical knowledge and scientific principles to trade confidently. Algorithmic traders do not keep any historical records about their trades, and they do not hold any physical securities for which they are responsible (such as stocks or futures). Instead, they use simple tools and strategies they develop themselves, often utilizing open source software and open network protocols.
The objective of the algorithmic traders is to profit from the large volume and speed that futures and options markets provide. It involves finding patterns in the data and using automated strategies to benefit from those patterns. Algorithmic Trading has been around for decades, but it’s updated and transformed by new technology every day.
Advantages of Algorithmic Trading
The most common application of algorithms is for market-making — buying and selling securities for other investors. Usually, market makers use algorithmic Trading to create liquidity. Market makers must have the capacity to execute big orders in large chunks in a short timeframe. In simple terms, market making involves buying securities from physical sellers with the intent of pushing those prices up. The basic idea is that market makers can take advantage of prices that are already high, then buy subsequently below those levels, effectively creating a push-pull relationship where price rises drive more sales.
Pattern Recognition and Artificial Intelligence have been used for years to automate markets and reduce the human effort involved in Trading. Thanks to these algorithms, traders can execute their trades more efficiently and with less effort. This saves companies money and allows traders to focus on higher quality trades while getting better results overall. Algorithmic Trading is also increasingly popular among wealthy individuals who use it for speculative purposes.
Trading involves risk, and it is ultimately a matter of chance. If the computer makes a mistake, it can lose money. It is also possible for computers to execute trades in wrong proportions, which can cause big numbers to appear and then disappear. In any event, algorithmic strategies involve making educated guesses about where the market will go next, which can be inaccurate even when the entire market is moving in your favor.
Algorithmic Trading is more complex than manual trading and is not for everyone. If you aren’t willing to put in the time and effort necessary to learn this form of trading, don’t bother trying it. But if you are curious about it and feel able to put in the time without too much hassle, then, by all means, give it a shot. It may turn out for what you’re looking for. But remember: Even if it doesn’t work out for you, Algorithmic Trading got you some exciting ideas that could have impacted the market more than anything else!