What is Algorithmic trading?

Dubai: An algorithm is a specific set of clearly defined instructions aimed to carry out a task or process.

Algorithmic trading is the process of using computers programmed to follow a defined set of instructions for placing a trade in order to generate profits at a speed and frequency that is impossible for a human trader. The defined sets of rules are based on timing, price, quantity or any mathematical model. Apart from profit opportunities for the trader, Algorithmic trading makes markets more liquid and makes trading more systematic by ruling out emotional human impacts on trading activities.

For instance, a trader could follow these simple trade criteria:

Buy 50 shares of a stock when its 50-day moving average goes above the 200-day moving average

Sell shares of the stock when its 50-day moving average goes below the 200-day moving average

Benefits of Algorithmic trading:

Trades executed at the best possible prices

Instant and accurate trade order placement

Trades timed correctly and instantly, to avoid significant price changes

Simultaneous automated checks on multiple market conditions

Reduced risk of manual errors in placing the trades

Backtest the algorithm, based on available historical and real-time data

Reduced possibility of mistakes by human traders based on emotional and psychological factors