Algorithmic trading is a process in which programmed computers are used for a high-speed trading. These computers are already programmed with algorithmic software to perform trading that will be otherwise impossible to do for a human.
This is also known as, Algo-trading, automated trading and black box trading. Algo-software is designed to meet a high speed, efficiency, and precision in trade. With this software and trading method trading has become very smart and easy to proceed. There is no chance of human error like biases, emotions etc.
How to operate Black box trading?
The whole trading system is automated. You will be better able to comprehend the concept after this example.
Suppose a trader buy 30 shares when the moving average of 30 days go above 100 days. Secondly, he sells 30 shares when the moving average of 30 days is below than the moving average of 100 days.
Note: moving average is an average that identifies the trends of daily price fluctuations on the basis of prior data.
According to these instructions, the computer is programmed once. Now, the trader does not need to check daily stock price and monitor order manually.
When the instructive conditions will meet, the computer will automatically buy and sell shares. This is how it works.
Strategies of Algo-Trading:
Strategies of black box trading are designed according to the policy of making a good earning, getting profit or reducing the cost. Some frequently used strategies are:
· Index fund remodelling
· Trading range mean
· Trend following policy
· Mathematical Model Based Strategy
· Time Weighted Average Price
· Implementation shortfall
Advantages of algorithmic trading:
This is a revolutionary advancement in the trading system. Some of its prominent advantages are:
· Precise Trading: With this system, trade has become very precise and accurate, high speed and accuracy allow dealing before any huge fluctuation in the price. There is no chance of human errors based on psychological and emotional behavior.
Trade is done without any significant investment.
· Fully Automated: Once the computer is programmed, there is no need to feed orders manually, the computer will do sales and buy shares itself at the decided time.
Algo-trading is a great way to reduce the number of the transaction due to rapid speed and precise action.
· Backtesting: You can check the validity of applied strategy by analyzing prior data and real data; this is called “backtesting”. The stringency of backtesting is directly proportional to the complexity of the computer program and the selected strategy.
An outstanding feature of Algo-Trading:
High-Frequency Trading (HFT) is the most stunning feature of black box trading. This feature has a capability of capitalizing large trading orders in different marketplaces at for different time period and pricing according to the give instructions and chosen strategy.
Algo-trading delivers a systematic approach to all trading markets. You can get high benefits in a short time and minimum investments. It is an advanced and easy to use an automated trading system that ruled out the chances of human's emotional and psychological mistakes.