Algo Trading: The Basics and How It Works

In this day and age, everything becomes faster and faster with the help of technology. You can order food on your phone in seconds, buy anything you want in the blink of an eye or call anyone you want to hear from in moments. As the fastest and most liquid financial market, the Forex industry has also taken its share from that transition. This trend of fast-paced trading has started with the authorization of electronic exchanges by the U.S Securities and Exchange Commission (SEC) and risen up by computerized High-Frequency Trading. At that time, the trading speed of HFT was 1000 times faster than the one of a human being. Now, that type of comparison has become meaningless due to the advances in algo trading. 

Algo trading, a.k.a. algorithmic trading or automated trading, is a type of trading that uses software executing trading activities based on the predetermined set of instructions. Normally, the capacity of a human being is limited. Algo trading expands the capacity of a trader by simply putting the speed and frequency first.

When people usually think about algo trading, they assume that the computer will do everything for them. That is wrong. The computer will follow your instructions that should be decided by considering your preferences. You can mathematically model your preferences depending on indicators, quantity, timing -anything you want. What a computer will do is to scan the market way faster than you and take action while precluding emotions and psychological factors.

What Do You Need In The First Place?

While talking about algo trading, there are some requirements to make it happen. First, you need a computer and we are not kidding. Your computer should always have access to the Internet and trading platforms to place orders efficiently. Then, you have to have programming knowledge if you do not want to use a pre-made algorithm. Make sure that you also provide a market data feed for your algorithm to monitor the changes in the market. Before you start to algo trade in real life, you have to backtest your system via historical data. If you observe that your algo is doing well based on the previous data, it is a sign for you to implement it immediately. 

If you think the system is complex and you cannot deal with it, do not worry. Lots of people have had second thoughts about algo trading in recent years, but it literally dominates the financial markets worldwide. According to the data, about 80-90% of the trading volume comes from algorithmic trading in the developed financial markets. Some might say the future is near. However, it is now and you should take a seat on that journey. 

Share this article

Leave a Reply

Your email address will not be published. Required fields are marked *