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Algo Trading

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By : JakeAmaral


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Algo trading (Algorithmic) is a process in which trades are executed automatically by a computer.







Imagine not having to scan the markets everyday and spend hours digesting boring stock charts for hours on end when your cute little laptop trades for you every single day, sounds too good to be true?







Well it is and isn't, let's delve deeper. Yes theoretically this can be done although it takes months and years of testing to make sure your Mac book is making the right logical decisions when placing a trade, there are so many variables such as time-frames, indicators and price actions when it comes to making a trade and developing successful strategies takes years to come into fruition but it can be done. If your an expert trader with successful strategies you can replicate that to a computer and autonomously execute it. In addition executing trades by a computer is miles faster than any human could physically do, you can potentially get entry and exit positions you never thought possible.










Big trading firms have tons of computers that are Algo trading 24/7 or whenever the market is open, they have poured billions of dollars into developing these systems but more importantly maintaining them. Anything can always be improved and with a market decided by millions of people strategies need to be altered, different market conditions can disrupt your current strategies. The algorithms need to be so good you need to trust a computer to make your financial decisions, even then I am sure they are still monitored and overrode at all times at big hedge funds.







Not to mention you need a decently powerful computer depending on the actions you want it to perform, scanning all of the stock markets and deciding which stocks to pick or reading candlesticks from months at a time is terabytes of data which can be very harsh to the computer's processor. And of course a decent internet connection is always required.








A profitable algorithm needs 3 core building blocks






1.) Multiple successful trading strategies backed by thorough back testing.


2.) In-depth risk management


3.) Execution strategy and order management












Encompassing all of these 3 elements will lead to succesful and ultimately profitable trading system all done automatically, but it needs to be cared for like a baby in order for it to grow and continue to live.