What is Algorithmic Trading

‍ I’ve seen a lot of people that believe artificial intelligence can anticipate the market (AI). To the best of my knowledge, the Efficient Market Theory indicates that it is unpredictable. Does this imply that trading is similar to gambling? Honestly, for the majority of traders, it is accurate, but that is not the complete picture. There are many other types of games, played by significant players in markets; For example, big market makers like brokerages and hedge funds have access to non-public information which makes them have different insights about the market. Large Banks have enough funds to influence and control prices in a market in the way they want. With the use of high-end High-Frequency Trading facilities accessible to financial institutes, it is possible to produce fake demands to change the value of a security. Although all of these examples are the plays of the big market makers, individual traders also have their own methods to be profitable in a market, such as money management, minimizing loss, lowering risk, trend trading, etc. Despite that what is the trading strategy or who is behind a trade, it has been shown that computers and algorithms are much better than humans in analyzing huge market data and executing trades. Right now, nearly 70% of all trades in the financial markets are executed by algorithms.

Algorithmic trading is the process of executing pre-programmed trading algorithms based on market indicators. The main objective of algorithmic trading which is also known as Algo-trading, is to increase a trader’s ability to react quickly to changes in market conditions and detect opportunities for profit. While manual traders have time on their side and can execute trades at opportune times, Algo traders can execute a large number of automated trades more frequently and consistently while minimizing the risk and human error that may be introduced if the trades were executed manually. In Algo Trading, depending on the strategies of the traders, some or all aspects of the trading, including the selection of the security, decision to buy or sell, the timing of the trade, quantity, and pricing can be determined by computer algorithms. Not only trading but also investing and portfolio assembling, have largely been influenced by algorithms and mathematical methods.