Algo-trading, also known as algorithmic trading, is an automated trading system that places buy and sell orders based on the rules of a computer program or algorithm. The algorithm may be designed to examine the price, but it may also include time and volume. As soon as the market circumstances meet the algorithm's parameters, the algo-trading program will place a buy or sell order. It enables quicker and more frequent trading across a whole portfolio, which would not be feasible with manual orders. Algo-trading secures the best pricing and eliminates the risk of slippage because orders are instantaneous. Algorithmic trading removes the human factor from the equation, lowering the chance of errors or emotional reactions to market conditions. Because of the increased order frequency, algo-trading produces more liquid markets on a macro level. It also improves market predictability since algorithms are built to adapt to changing conditions.
Algo-trading may be used for a variety of trading techniques. Arbitrageurs who rely on incremental price differences can assure order efficiency by using an algorithm. Short-term traders and scalpers who want to profit from minor market fluctuations employ algo-trading to guarantee they can execute at a high enough frequency to be successful and avoid chasing losses. Market makers also utilize algo-trading to guarantee that the market has a suitable depth of liquidity. Traders also employ algo-trading to backtest a certain strategy to see whether it can consistently generate a profit.
There are various potential issues with algo trading, particularly when it comes to difficulties like system failures or network disruptions. Backtesting is essential for ensuring that the algorithm works as intended. An algorithm will always perform precisely what it is intended to do, and it cannot account for unforeseen "black swan" occurrences that may necessitate additional human intervention and mitigation measures.