Glossary: What is Algorithmic Trading?

What is Algorithmic Trading?

Algorithmic trading involves using advanced computer programs to execute trades in financial markets based on predefined strategies. These programs operate at high speed, analysing market data and executing trades faster than humanly possible.

Explanation

This trading method relies on algorithms—sets of instructions designed to automate the decision-making process. It eliminates emotions from trading and enables consistent strategy application, even under volatile conditions. Financial institutions use it to gain a competitive edge through rapid and precise execution.

Practical Example of Algorithmic Trading

Consider a scenario where an algorithm buys shares of a company when their price falls below a set threshold and sells them once a target profit margin is achieved. Another example is high-frequency trading (HFT), where thousands of small trades are made within milliseconds, leveraging minimal price differences for substantial aggregate gains.