The rise of the digital technology age has led to a new way of trading stocks called algorithmic trading. To those who don’t understand it, the stock market can be a voracious beast. But, nowadays, you don’t even need to understand that to make money.
Hence, you need to know how algorithmic trading works.
The Basics of Algorithmic Trading
Through algorithmic trading strategies, you can ensure that trades are performed at exactly the right time, order amounts are perfectly correct, multiple market indicators can be reviewed simultaneously and you can reduce the possibility of manual errors.
Algorithmic trading can be done on a small scale but most modern something-trading is done in a way called high-frequency trading (HFT). This means that the algorithm places a large number of trades in quick succession, making each trading a little bit of money, which then adds up to a great amount.
This trading technique became popular as stock exchanges around the world offered opportunities to make their stock more available or more marketable to businesses.
How Algorithmic Trading Works
Use the average trader for example. When the 50-day moving average goes above the 200-day moving average, they buy 50 shares of stock. This is the basis of a technical indication that a short-term rise in stock.
Then, the same trader would sell that stock if the moving 50-day average goes below the moving 200-day average. Or, if the stock is entering a downtrend.
These two principles are fairly simple aspects of technical trading. But, that trader would have to monitor a lot of data on an ongoing basis. And then, they can often be emotionally swayed in the wrong direction.
A computer system would be configured to sell and buy in compliance with certain previous criteria for it. Hence, the trader would not have to track data regularly anymore.
