Algorithmic trading (or algo-trading) is a trading process which utilises highly complex mathematical formulae encoded within a high speed computer program to develop and execute trading strategies with an aim to maximize gains. It utilises various parameters such as time, price and volume to create a trading order based on the strategies developed by the program. It is also called as black-box trading or automated trading.
Algorithmic trading has wide range of applications, specifically in the pension fund, mutual fund, investment banks and other institutional traders. It divides larger trades into smaller trades which in turn manages the market trend and minimises the risk.
Algorithmic trading has its own share of unique benefits such as the trading occurs at the best possible time due to the trading strategies developed by the system. It also keeps an eye on stock prices for same commodity in different markets which allows it to choose the best location and timing of trader, maximizing the profit. It also recues the probability of man made errors out of the equation to minimal. It also removes the physiological and emotion aspects shown during manual trading. It also provides an opportunity to backtest and optimize the algorithm and mathematical models on historical data and results.
The bottom line is that algorithmic trading is an attractive method as it aims to make more money with less efforts. While this fact is certainly true, one must make sure that the computer is in optimal condition and power connections are well backed up in case of failure to avoid huge losses. If all the aspects are well taken care of, one certainly shall be staring at an absolute money making method.
