Algorithmic trading (also called algo-trading) uses a computer program that follows a defined set of instructions (an algorithm) to evaluate a financial asset. The defined sets of instructions are generally based on timing, price, quantity, or any mathematical model. Apart from profit opportunities for the trader, algo-trading renders markets more liquid and trading more systematic by ruling out the impact of human emotions on trading activities.
Technical Requirements for Algorithmic Trading
Implementing the algorithm using a computer program is the final component of algorithmic trading, accompanied by backtesting (trying out the algorithm on historical periods of past stock-market performance to see if using it would have been profitable). The challenge is to transform the identified strategy into an integrated computerized process that has access to a trading account for placing orders. The following are the requirements for algorithmic trading:
- Computer-programming knowledge to program the required trading strategy, hired programmers, or pre-made trading software.
- Network connectivity and access to trading platforms to place orders.
- Access to market data feeds that will be monitored by the algorithm for opportunities to place orders.
- The ability and infrastructure to backtest the system once it is built before it goes live on real markets.
- Available historical data for backtesting depending on the complexity of rules implemented in the algorithm.