How Algorithmic Trading Works and Why It Matters

Algorithmic trading (algo trading) is basically letting a machine do what you would do manually, but much faster and without emotions involved. Tired of watching FOMO make you buy at the peak? Here is the solution.

What Is Algo Trading Really?

In short: they are computer programs that automatically buy and sell according to rules you set. The algorithm monitors the market 24/7, identifies opportunities, and executes orders in milliseconds. While you sleep, your bot is working.

The 3 Steps to Implement It

1. Design your strategy

First, you need a clear rule. For example: “Buy when the price drops 5%, sell when it rises 5%”. It's that simple ( or as complex as you want ).

2. Encode the algorithm

Turn that rule into code. Python is the most popular because it is easy to learn and has powerful libraries for data analysis. The algorithm needs:

• Download historical data
• Generate buy/sell signals
• Execute orders automatically

3. Test with historical data (backtesting)

Before putting in real money, simulate how your strategy would have worked in the past. Would you have won? Would you have lost? Adjust until it works.

Strategies Used by Professionals

VWAP (Volume Weighted) Split a large order into small pieces and execute it slowly so as not to move the price against you.

TWAP (Time Weighted) Similar to VWAP but without considering volume, just spreading the order evenly over time.

POV (Volume Percentage) Execute your order representing a % of the total market volume. Less impact on the price.

The Obvious Advantage: No Emotions

An algorithm does not suffer from FOMO or panic. It executes according to rules. Period. This eliminates impulsive decisions that destroy portfolios.

The Dark Side

• Requires technical skill: It's not for everyone. You need to know how to code or hire someone.
• It can fail: Bugs, internet disconnections, server crashes. One error = lost money.
• The market is unpredictable: Perfect backtesting does not guarantee future results.

The Reality

Algo trading is powerful, but it is not magic. The key is constant monitoring and adjustments when market conditions change. Those who win with this are those who understand both the technique and finance.