Algorithmic Trading
tl;dr
Algorithmic trading uses computer programs to automatically buy and sell stocks based on pre-set rules. It allows traders to take advantage of small price movements without needing to watch the market all the time.
Definition.
The use of computer algorithms to automate trading decisions and execution.
Real-World Example.
Imagine you want to buy and sell stocks, but you don’t have the time to monitor the market all day. Algorithmic trading is like having a robot do the trading for you, based on rules you set. These rules could be things like, “Buy this stock when its price drops by 5%” or “Sell when the stock price rises by 10%.”
For example, in a fast-paced market, an algorithm might notice that a stock is about to hit a certain price point, and within milliseconds, the algorithm will buy or sell the stock at the right price — much faster than a human could do. This allows traders to take advantage of tiny price changes and make profits, often without having to lift a finger.
How to Use Algorithmic Trading.
- Set Your Trading Strategy: Decide on the rules you want the algorithm to follow. This could include setting specific conditions like buying when the stock price falls to a certain level or selling when it hits a target price.
- Choose an Algorithmic Trading Platform: There are several platforms, such as MetaTrader, TradeStation, or AlgoTrader, that let you set up your own algorithm or use pre-built ones.
- Input the Rules: Most platforms have a simple interface where you can input your specific rules. You can choose strategies based on moving averages, volatility, or price action.
- Backtest the Algorithm: Before you go live, backtest the algorithm on historical data to see how it would have performed in the past. This can help you avoid big surprises in real trading.
- Go Live: Once you’re confident in the algorithm’s performance, you can let it trade automatically on your behalf. The algorithm will monitor the market, analyze data, and execute trades according to the rules you’ve set.
