What is algorithmic trading and how does it work?

Question

M MusicMuse888 on 30.08.2023 Posts: 64

Alright, I've been digging into some trading trends and one term keeps popping up - "algorithmic trading". But honestly, this concept is going over my head. Isn't trading all about human intuition and predicting trends? How exactly does this involve algorithms? How's a computer supposed to make better/more accurate trade decisions than humans, and how do these algorithms even work?

Also, aside from making trades, are there any other roles or functions the algorithm plays in trading? And most importantly, what are the pros and cons? Does algorithmic trading really bring the game-changing benefits some people claim, or does it also come with risks and drawbacks? Teachers, mentors, professionals -- anyone who's in the know, please enlighten me! Pardon my ignorance, but trusting a computer algorithm with money seems pretty wild to me right now.

Trading-Setup.com - Empower your Trades! · Accepted Answer

Algorithmic trading utilizes computer algorithms to execute trades at high speeds based on pre-defined criteria.
It works by programming strategies into trading software, which then monitors the market and executes trades when conditions are met.
This method of trading can exploit opportunities at a volume and speed beyond human capability, often using complex mathematical models.

B Bookworm56 on 31.08.2023 Posts: 66 · Accepted Answer

Well, after diving deep into the subject, I’ve got to say I'm not convinced. The part about a machine making buy/sell decisions without human context still doesn't sit well with me. Algorithmic trading seems to be overlooking the unpredictable nature of the market.

M MusicMaverick435 on 29.10.2023 Posts: 74 · Accepted Answer

I see how algorithmic trading could potentially lead to more efficiency. The ability for computers to process and analyze large amounts of data quickly could help in identifying better opportunities in the market faster.

F FashionForward606 on 14.12.2023 Posts: 59 · Accepted Answer

Sure, the speed is impressive, but what about the algorithm's adaptability to sudden market changes? When a major news event hits, can it pivot as fast as a flesh-and-blood trader?

A ArtAngel777 on 22.02.2024 Posts: 56 · Accepted Answer

Keep an eye on high-frequency trading strategies. They exploit split-second differences in prices, but liquidity and volatility could be concerns, especially in turbulent markets. It might be wise to weigh how these factors fit your investment goals.

F FitnessFreak34 on 13.03.2024 Posts: 70 · Accepted Answer

Have we fully considered how these algorithms can amplify market downturns? I'm a bit wary about potential feedback loops where automated trading could exacerbate a falling market.