All About Algorithm Trading: Algorithm Trading in Practice

Algorithmic Trading

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Imagine how much time you could save if you could automate your trading. Just set your trading preferences once and forget about checking the market data manually to place your buy or sell orders. What if I told you it’s a reality? And it’s much easier than you might think at first. Let’s dive in to discover what algorithm trading is and how you can get the most by automating your trades.

What is Algorithm Trading?

Algorithm trading enables you to pre-program trading instructions to your account for variables, such as price, timing, and volume, to automate your trading. Once the current market conditions match your predetermined criteria, trading algorithms can execute a buy or sell order on your behalf.

In order to make decisions to buy or sell stocks on an exchange, algorithm trading uses the combination of complex formulas, mathematical models, and human oversight.

Using an algorithm can save you time scanning the markets. Plus, it executes trades almost instantly.

Alternatively, you might come across algorithm trading called:

  • Algo-trading
  • Automated trading
  • Black-box trading

Theoretically, algorithm trading can generate profits at a frequency and speed that’s impossible for a human trader. Experienced algorithm traders even leverage high-frequency trading technology, which lets them make tens of thousands of trades per second.

History of Algorithms in the Stock Market

Many people think algorithm trading is a new concept and avoid trusting it. In fact, the use of algorithmic trading dates back to 1998 when the U.S Securities and Exchange Commission (SEC) authorized computerized high-frequency trading.

As high-frequency trading (HFT) executes trades 1000 times faster than a human, it has become widespread ever since.

Let’s review some interesting historical facts about HFT up to date:

  • While by the year 2001, HFT executed trades in several seconds, by 2010 this had been minimized to milliseconds.
  • High-frequency trading volume grew by 164% between 2005 and 2009.
  • In 2011, Fixnetix launched the nano trading technology, allowing you to execute trades in nanoseconds. (1 Nanosecond = 0.000000001 seconds)

Understanding Algorithm Trading: Algorithm Trading in Practice

Now that you know what algorithm trading is and how it works, you might be wondering how to put it into practice.

Let’s suppose you follow the following simple trade criteria:

  • Buy 50 shares of a stock when its 50-day moving average goes above the 200-day moving average. (A moving average is an average of past data points that identifies trends).
  • Sell shares of stock when its 50-day moving average goes below the 200-day moving average.

As an algorithm trader, you’d create the commands using a computer program to monitor the stock price. Once your defined conditions are met, the tool will automatically place buy and sell orders.

Using algorithmic trading, you no longer have to monitor live prices and graphs or place orders manually. All you need to do is set up your trading criteria once and let the algorithm work for you.

Benefits of Algorithm Trading

There are quite a lot of reasons why you should use algorithmic trading. Let’s discuss the essential benefits of algorithmic trading:

  • Algorithm trading allows trades at the best possible prices and reduced transaction costs.
  • An algorithm works 24 hours a day and instantly places a buy or sell order once it meets your predetermined conditions. This eliminates significant price changes.
  • Algo trading eliminates human error. While trading, it’s easy to follow your emotions that might get in the way of realizing potential profits or losses. And algorithmic trading doesn’t allow you to act upon your feelings.
  • It’s low maintenance. You just set up the set of trading rules, and the algorithm works for you – day and night.
  • It offers increased opportunities. Simply choose or create an algorithm according to your strategy and maximize your exposure to opportunities in the underlying market.
  • Allows you to capitalize on rare special events, such as Dow closing 500 below its 20-day moving average.


To set up algorithm automation, you typically need to use a computer language like Python. However, using Python requires you to have coding experience.

Nevertheless, there are managed services that you can use through web browsers without any technical skills. You can discover the 3 best tools to set up your trading automation easily.

1. Alpaca

Founded in 2015, Alpaca is a commission-free broker-dealer that’s specifically designed for algorithmic trading. It allows you to quickly set up your trade automation to buy, sell, and short U.S. stocks.

2. InteractiveBrokers

InteractiveBrokers is one of the best broker-dealers for active traders. The company has been in the financial trading industry since 1978. While algorithmic trading isn’t the main focus of InteractiveBrokers, it offers a pretty robust tool to automate your trades.

3. QuantConnect

QuantConnect is an automated trading platform that provides tools to backtest and live-trade algorithmically. The platform is built using the C# programming language and allows you to test algorithms in multiple languages, such as C# and Python.

Additionally, QuantConnect also gives you access to multiple financial markets, including stocks, forex, crypto, futures, and equities.

4. QuantRocket

QuantRocket is a Python-based algorithmic trading platform that allows you to research, backtest, and automate your trading. Additionally, QuantRocket also provides scheduling, notification, and maintenance tools to help you set your trading strategies.

Using a Docker, you can install QuantRocket either locally or in the cloud.

5. Quandl

Quandl is a premium tool owned by Nasdaq with a long history of success. It’s an excellent source for financial, economic, and alternative datasets that are serving professional investors. Over 400,000 investors use Quandl from the world’s top hedge funds, investment banks, and asset managers.

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