First, we must break down the term algorithmic trading in order to understand what it means. The word ‘trading’ refers to “buying and selling in capital markets.” The word ‘algorithmic’ branches off the word ‘algorithm’ which means “a process or set of rules to be followed in calculations or other problem-solving operations, usually by a computer in order to get the desired result.”
Combining these two words we get what we call ‘algorithmic trading’. Algorithmic trading is when a trader gives precise orders to a computer to execute trades at a specific time. This execution can vary depending on the rules defined in the algorithm.
There are two types of algo trading:
- Dummy Executions
- Trade-Ideas Generator
Dummy executions consists of a simple input to get the desired output. A trader can input certain parameters into the algorithm to give some direction. Now that the algorithm has some sort of direction, a trader no longer has to constantly check his computer to see if it is time to execute a trade. The algorithm takes care of itself as to when to get in and out of trades. This trading style is also beneficial because it takes the emotion out of trading. Computers are more reliable and disciplined than humans which allows smarter and more clinical trades using statistical history. Due to the convenience of dummy executions hedge funds, banks, and teams of researchers have been employing these dummy execution features for years now all the way up to the present day.
The second type of algo trading is an algorithm that produces trade ideas. This type of algorithm produces trade ideas by constantly retrieving data on the market allowing the computer to recognize new opportunities for trading. These trade ideas can either go through automatically or the trader can decide for themselves whether to act upon them and take a position in the market. Traders can employ this type of algo trading by either building their own algorithm (which many people find too difficult) or one can just use someone else’s platform.
If you decided to choose the latter, this is what we do at BetterTrader. Not only does it already have a great algorithm producing trade ideas, but our platform also notifies you about it many other important events and news that move the markets. You can easily choose to follow more or less events any time within the application.
In order to trade in today’s age, one needs to trade with at least one form of algo trading because trading is looking more like a zero-sum game. This means if you don’t have the edge, you will probably lose to someone else that does have that edge. If you can master both forms of algo trading then you will have a competitive advantage over most traders. It’s time to get ahead of the game as society shifts to using both forms of algo trading.