Understanding Trading Algorithms and their functionality

Trading Algorithms, as the name suggests, is an automated investment tool. Also referred to as the black box investing, algo trading and mechanical investing, it is a program containing trading criteria and rules. The program functions as an automated investment mechanism that defines the entry and exit point of the trading. Although it is a program, monitoring constantly is necessary to avoid unforeseen circumstances. The reason is the changing conditions of the market. The constant monitoring helps in altering the program according to the required parameters.

Trading Algorithms VideoAlgorithmic trading uses algorithms as the key input to its functionality. Configuring the algorithm is easy and calculates the cycles, market trends, timing of the tops and bottoms, entering the orders and managing the open positions. At all levels, most of the execution do not require any human interference.

Success in life depends on strategies and planning. Successful people across the globe move ahead with a particular approach. Implementing strategies and planning in trading assists in avoiding risks associated with the fluctuating market conditions.

Trading Algorithms History

Large institutions such as the mutual fund houses, hedge funds, and market makers use the algorithms for trading. Market-driven investors and large broking houses also use the algorithms to benefit from the computational program. With the utilization of the trading algorithms, dividing a large or bulk volume into smaller trading options becomes easy. Such a step reduces the risk associated with a single investment due to fluctuating market conditions. The market impact on the smaller trades is little and offers benefits when traded with optimization.

The other face of the market is the selling category, where traders such as hedge funds and makers provide liquidity by generating and executing algorithmic trading system in their unique operation. Such a step provides the balance in the market and enables the buyers to receive the options of purchase.

Algorithmic trading systems also offer the “high-frequency trading”. Such a system pushes the black box, algo trading and automated trading into the bad reputation category. In an HFT system, the algorithm functions much before a human action. It receives the necessary data related to the market in electronic format. It then processes the data and decides the best trading option, thereby, eliminating the intervention of a human. The processing speed depends on the information collected. However, the execution is faster in comparison to a human being. Such an algorithm is generating tremendous response in the market, especially during the intraday session, where the market opens up for the liquidity. Algorithmic trading is beneficial in implementing a strategy such as market making, arbitrage, inter-market spreading, and speculations.

In comparison to other markets, markets of the American and European have a larger concentration of the algorithmic automated systems. A rumor spread in the year 2008 states that around 80% of the trading took place through these algorithm platforms across the markets. Algorithms for trading and HFT are a hot topic across the markets since 2010 due to the volatility they caused in the markets, according to the U.S Securities and Exchange Commission and the Commodity Futures Trading Commission.

Conclusion on Trading Algorithms

It is impossible to neglect the HFT systems. If we tend to ignore their presence in the market trading, the only option left is to look towards trading algorithms. These systems are slow, involves less complexity to build, test, and execute. As an individual, you have the choice to choose ALGOTRADES automated trading system that functions efficiently and operates according to the strategies, rules, and market timings. You are bound to receive a high-performance trading automation that manages trading and delivers consistent performance.