Publication date: July 5, 2024

The term algorithmic trading has been used more and more in recent years. Time to explain this modern way of trading.

What is algorithmic trading?

Algorithmic trading is a form of trading in which computers and sophisticated software programs are used to make trading decisions and execute trades based on a predefined set of criteria. These criteria can range from simple rules, such as buying a stock when the price falls below a certain level, to complex mathematical models that analyze multiple market factors simultaneously.

Characteristics of algorithmic trading

- Speed: Due to its execution by computers, trades can be completed in a split second, surpassing the speed at which any human could operate.

- Volume: Algorithmic trading makes it possible to execute large volumes of trades in a short period.

- Efficiency: By removing the influence of human emotions and potential errors, algorithms can enhance the efficiency of trading decisions.

- Complexity: Advanced algorithms can execute complex trading strategies that would be difficult for humans to use.


Advantages

1. Consistency: Perhaps the most important advantage. Algorithms can act according to fixed rules without the influence of emotions, yielding more consistent results.

2. Speed and Accuracy: Computers can react to market conditions much faster than humans, which can lead to more accurate trading decisions.


Disadvantages

1. Technical risks: Problems such as software errors or infrastructure failures can cause significant losses.

2. Market volatility: Massive algorithmic trading can increase market volatility, especially during times of panic.


Application

Algorithmic trading is used by various market participants, including hedge funds, institutional investors, and individual traders with access to the necessary technology and knowledge.

In short, algorithmic trading combines financial knowledge with technology to automate and optimize trading, which can lead to more efficient and potentially profitable trading activities.



Disclaimer: Investing involves risk. Our analysts are not financial advisors. Always consult an advisor when making financial decisions. The information and tips provided on this website are based on our analysts' own insights and experiences. Therefore, they are for educational purposes only.