Algorithmic trading is the process to execute the trades with automated pre-programmed trading that instruction. Within the program, we include various variables, ranging from price, timing, to volume. Basically, the program aims to solve problems.
The program sends part of the market order over time. Within this program, we have complex formulas, as well as, mathematic models and human oversight. Those components, then, make the decision to buy or sell particular financial securities.
Usually, algorithmic traders use the high –frequency trading technology that allows them to have thousands of trades per second. Traders can use this program in various situations, like order execution, trend trading, and arbitrage strategies.
Ways that Algorithmic Trading Works
This type of trading has gained popularity ever since trading systems have been introduced in American financial markets during the 1970s.
Besides, Michael Lewis, as an author, has also increased the popularity of high-frequency algorithmic trading by publishing the best-selling book Flash Boys. Inside the book, he told the story of a Wall Street trader who helps to build companies that define the structure of electronic trading in America.
Ways to Do Algorithmic Trading by Yourself
Recently, there has been a widespread of doing this type of trading by yourself. Many hedge funds have crowdsourced thousands of algorithms from amateur programmers. Those programmers usually compete to win commissions.
Thanks to the development of high-speed internet and ever-faster computers, this practice has been made possible. Hedge funds do that to serve their day traders clients who want to try algorithmic trading.
Besides those factors, now we also have another emergent technology on Wall Street namely machine learning, this new artificial intelligence technology allows programmers to develop programs that can even improve themselves. That process is possible due to an iterative process called deep learning.
Traders who use algorithms with deep learning abilities have the tendency to gain more profit.