It’s a method of executing trades in financial markets using computer software. The whole process involves the use of pre-programmed instructions to be automatically executed relying on specific trading strategies which are based on predefined criteria such as price, volume or timing.
Algorithmic trading replies on computer systems to buy financial instruments automatically when predefined market conditions are met. Traders or software developers design, generate and implement algorithms which analyze market data, identifying trading opportunities while automatically executing buy or sell orders. These algorithms can be designed to incorporate various factors, such as technical indicators, statistics and statistical models and market trends.
Algo trading allows faster, more precise and efficient trade execution, as software can process vast amounts of data and respond to market conditions in real time. Human emotions and biases can be removed from taking trading decisions and high frequency trading by applying a large number of trades and market positions may exploit even the slightest price movements in traders’ favor.
However, taking into consideration the above characteristics of algorithmic trading, and applying them to a real trading account, can automatically placing trades be profitable as a long-term investment? The answer is not that simple, but yes. It is possible to make money using algorithmic trading.
Trades can be executed more accurate than being placed by a human, but the golden rule is to test, back-test and first try any algorithmic trading technique to a demo account to see how the software will react in different market conditions and price movements. Although automatic trading may have some positive results in the short-term, there are many factors that may affect its efficiency in the long term, hence continuous monitoring and testing is necessary.
One profitable trading technique is scalping. Traders usually apply algorithmic trading in scalping trading techniques as it involves rapid purchasing (buy/sell) of different assets to quickly check out profits from small increments at the market movements and prices. You can find a detailed article for Forex Trading and Scalping here: Forex scalping and scalping trading strategies
You can also find a very useful article for automated trading styles and strategies here: Expert Advisors (EA) software trading - Automatic trading, where it’s worth noting that automatic trading has attracted both praise and criticism, while there are many regulators who introduced measures to monitor and regulate algorithmic trading to maintain market integrity and stability.