31/05/2020
Algo Trading stands for algorithmic trading.
As the name suggests, it is a type of trading done by a predefined and well tested algorithm.
This algorithm is executed by a computer program.
The reason why any algorithmic trading is done by a computer program is simply because a computer is far better than humans in following instructions and million times faster in doing so.
The simple idea behind an Algo Trading is once the instructions are given to a computer to perform trades in terms of when to buy stocks and when to sell them, it is ready to execute the algorithm.
It gets more complex when various trading strategies, logic and future predictions capability is added to the algorithm.
How to develop an Algo ?
Developing an Algo Trading program is very complex task. Giants like JP Morgan, Berkshire Hathaway and many others spent a lot of years and funds in developing their own Algos.
An outline of an Algo Trading bot is as follows.
A trading bot is created to trade in one company's stock.
The logic or a strategy instructions are given as in when to buy, how long to hold, at which margin to sell in case of loss etc.
The bot is fed with the initial information for example: Maximum allotted funds to trade, time to hold onto the stock etc.
Test the algorithm for historical data. More the data, more accurate the algo can become by fine tuning the logic and strategy of the program.
With such a large set of historical data, Algo Trading is equipped with machine learning abilities in order to predict the future of share prices.
Imagine multiple bots trading multiple company stocks.
Why Algo Trading?
A sophisticated Algo Trading program can perform millions of trade transaction in a day.
A person at the most can carry out not more than 100 transactions a day.
For a human, most of the time will be wasted in simple operations such as placing buy and sell orders, keeping track of company's stocks, loading pages in the browser or a mobile app and so on.
And worst thing a human can do is have an emotional attachment towards company stock when in reality it should be dealt with total objective mindset.