Algorithmic (algo) trading is a trading strategy that uses computer programs with predefined criteria to automatically execute trades.
Algo trading has seen tremendous growth in usage over the past decade as nearly all marketplaces have transitioned to electronic markets. Electronic markets allow for the possibility to write algorithms and programs that execute trades automatically and instantaneously.
The speed and accuracy at which these programs can execute trades is one of the main reasons behind the growth algo trading in the past couple of years.
An example of the type of algorithm that may be written is:
Buy if the RSI oscillator drops below 30 and sell if the RSI goes above 70.
Writing a program that contains trading criteria like this (although often much more complicated), allows for the computer to monitor changes in the markets and execute trades automatically, without having any human involvement.
There are many other advantages to algo trading other than speed and accuracy, as discussed in the following lesson.
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