algorithmic trading
The use of computer programs and algorithms to execute trades automatically based on predefined criteria, removing human emotion from trading decisions.
Example
“The hedge fund's algorithmic trading system automatically rebalanced its portfolio whenever volatility exceeded certain thresholds.”
Memory Tip
ALGORITHMIC trading = computers trade using ALGORITHMS. No human emotion, pure rules.
Why It Matters
Algorithmic trading impacts market efficiency and liquidity for all investors, including everyday people with retirement accounts and index funds. Understanding how these automated systems work helps you recognize that markets move based on programmed logic, not just human decisions, which can affect your investment returns and portfolio performance.
Common Misconception
Many people believe algorithmic trading is exclusively used by elite hedge funds and is inaccessible to regular investors. In reality, most mutual funds and robo-advisors use algorithmic strategies, and some retail trading platforms offer algorithm-based tools to individual traders with modest accounts.
In Practice
A trader might set an algorithm to buy 100 shares of a stock whenever its price drops 5 percent below its 50-day moving average and sell when it rises 3 percent above that average. If a stock trading at 100 dollars drops to 95 dollars, the algorithm automatically executes the purchase without waiting for the trader to monitor markets, potentially capturing gains if the price recovers to 98 dollars for a 3 dollar profit per share.
Etymology
ALGORITHM (step-by-step mathematical procedure) TRADING. TRADING executed by an ALGORITHM.
Common Misspellings
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Related Terms
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See Also
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