Algorithm trading is also called automated trading, algo-trading, or black-box trading. This kind of trading utilizes computerized programs that follow a set of instructions, which are defined also referred to as an algorithm for the placement of a trade. In theory, the trade can lead to profit generation, which is higher and more so impossible for a human trader.
The algorithm is therefore based and designed on trading factors such as price, timing, and quantity as well as any other mathematical model.
Algo-trading has advantages for both the trader and the market. Concerning the trader, it has tremendous opportunism related to profit-making, it also allows the markets to have more liquidity and more so a more systematic means of trading since it rules out the impact and pressure exerted on the market by the human-related emotions as well as other trading activities.
Algo-trading allows trades to be carried out when the best prices at the place. It also allows placement of orders to instant and more accurate hence increasing the chances of execution at the desired levels. Due to such instance, trades are time correctly, therefore, avoiding changes in prices which are significant.
Algorithms also help reduce the cost of transactions and ensure that the multiple market conditions are automatically checked simultaneously.
This check allows the reduction of risk concerning manual errors at the time of trade placing. It is easy to test algo-trading through the use of real-time and historical data, which is available. Such backtesting allows traders and the market to assess the viability of the trading strategy.