In algo-trading, buy and sell orders are automatically generated by a computer program or algorithm and then executed.
What is Algorithmic Trading or Algo Trading?
Algo-trading, also known as algorithmic trading, is an automated trading system in which buy and sell orders are placed based on the rules of a computer program or algorithmic trading algorithm. However, the algorithm can be configured to take into account other factors, such as timing and volume, when making a decision. Algo-trading software will place a buy or sell order as soon as market conditions meet the algorithm’s criteria.
Example: As long as the ten-day moving average rises higher than the 30-day moving average, it’s a good time to buy Bitcoin. To build a formula for profitable trading, algo-trading requires far more complicated rules and conditions.
Algo-trading is used by many traders for a variety of reasons, including the ability to trade faster and more frequently than would be possible with manual orders. Because algo-trading orders are instantaneous, it ensures the best prices and minimizes the risk of slippage. As a result, algorithmic trading eliminates human error and emotional reactions to market conditions.
By increasing order frequency, algo-trading increases market liquidity on a macro level. Because algorithms are programmed to respond to changes in the environment, the market becomes more predictable.
Many markets use algo-trading, but the 24/7 cryptocurrency markets, where traders risk missing out on opportunities or incurring losses while they sleep, benefit the most from it. Because of this, even those who prefer to trade by hand can rely on algo-trading as a backup strategy when they are not able to monitor their charts.
Trading strategies that can benefit from algorithmic trading include a wide variety. An algorithm can be used by arbitrageurs who rely on small price differences to ensure order efficiency. With algo-trading, short-term traders and scalpers can ensure they can execute at a high enough frequency to be profitable and eliminate the risk of chasing losses in smaller market movements. The use of algorithms by market makers helps to keep the market’s liquidity at a healthy level.
Additionally, traders use algo-trading in order to backtest a specific strategy in order to see if it can consistently produce a positive return.
Algorithmic trading carries some inherent dangers, particularly in the event of system or network failure. For this reason, backtesting is crucial in ensuring that the algorithm performs as expected, since algorithms are also programmed by humans.
An algorithm, on the other hand, does exactly what it’s programmed to do and does not take into account any unexpected “black swan” events that may call for intervention and mitigating actions.