Here is an attempt to describe the Algo Trading business in layman’s terms. To understand it, let’s split the phrase into two words: “Algo” and “Trading.” As you may already know, “Trading” stands for the action of buying and selling stocks in the capital markets. The word “Algo” stands for “Algorithmic.” If you already know what an algorithm is, you can skip the next section.
Understanding the “Algorithm”
An algorithm is a clearly defined, step-by-step set of operations to be performed. For example, if you are assigned the task of drinking water from a bottle, the algorithm (set of operations) would be:
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Get the water bottle.
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Open the cap.
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Drink the water.
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Close the cap.
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Place the bottle back in the right place.
Simple, right? Similarly, in a computer system, when you need a machine to do something for you, you explain the job clearly by setting instructions for it to execute. This process is also called “programming a computer.”
The Evolution of the Stock Market
Many of you might already know that before electronic trading took over, stock trading was mainly a paper-based activity. There were actual stock certificates, and one needed to be physically present to buy or sell.
Then came dematerialization (DEMAT). Actual certificates were slowly replaced by electronic forms that could be registered or transferred digitally. This increased fluctuations in stock prices because the trading process became faster. But with further technological developments came the next big thing: ALGO TRADING.
How Algo Trading Works
Today, you can write an algorithm and instruct a computer to buy or sell stocks for you the moment defined conditions are met. These programmed computers can trade at a speed and frequency that is impossible for a human trader.
Because this process can be semi-automated or completely automated, the terms “automated trading” and “algo trading” are often used interchangeably. However, there is a small difference between the two. If you are an experienced stock trader with a specific strategy, you can best utilize algo trading by setting precise instructions (the algorithm) for a computer to execute when your conditions are triggered.
The Role of Technical Analysis
Knowledge of the technical analysis of stocks plays an important role in developing a profitable trading strategy. Technical analysis is the academic study of chart patterns and trends of publicly traded stocks.
Soon, I will provide more content here to help you master technical analysis. Feel free to comment below!
Happy Trading!
