Algorithmic trading is a type of trading that involves the use of computer programs to execute trades automatically according to predefined rules and strategies. These programs analyze market data, such as price and volume, in real-time and make trading decisions based on the results.
The algorithms used in algorithmic trading can range from relatively simple to highly complex, depending on the strategy being employed. Some common strategies include trend-following, mean reversion, and statistical arbitrage.
To execute trades automatically, algorithmic trading programs use APIs (Application Programming Interfaces) provided by trading platforms or brokers to connect to the markets. Once connected, they can place orders, modify or cancel existing orders, and monitor positions in real-time.
Algorithmic trading has several advantages over traditional manual trading, including the ability to process vast amounts of data quickly, the ability to execute trades with precision and speed, and the ability to operate 24/7. However, it also comes with its own set of risks, such as technical glitches, market volatility, and the potential for algorithmic errors or malfunctions.
Algorithmic trading is commonly used by institutional investors such as hedge funds, investment banks, and large trading firms such as Global Financial Engineering, but it is also becoming increasingly accessible to individual traders through online trading platforms and brokerages.