Algorithmic trading, also known as algo trading or automated trading, is a trading strategy that uses computer algorithms to automatically execute trades based on pre-set rules and criteria.
Algo trading involves the use of software programs or algorithms that are designed to analyze market data, such as price movements, volume, and other indicators, in real-time. Based on these analyses, the algorithm will generate buy or sell signals, which can be executed automatically by the trading software.
Algo trading can be used in a variety of financial markets, including forex, stocks, futures, and options. It is popular among institutional investors, such as hedge funds and investment banks, as well as retail traders who use algorithmic trading platforms provided by brokers.
The benefits of algo trading include the ability to execute trades at high speeds and volumes, reduce the impact of human emotion on trading decisions, and backtest strategies using historical data. However, there are also risks associated with algo trading, such as errors in the programming of the algorithm, technical failures, and market volatility.