What is Algorithmic Trading?

Algorithmic trading (algo trading) is the use of computer programs to execute trading decisions based on predefined rules. Unlike discretionary trading where you manually decide when to buy or sell, algorithmic trading automates these decisions.

Why Algorithmic Trading?

There are three core reasons why algorithmic trading matters:

  1. Consistency — Remove emotional decisions from trading
  2. Speed — Execute faster than manual trading
  3. Backtesting — Test strategies on historical data before risking real money

The Fundamental Concept

At its core, an algorithmic trading system follows this simple flow:

Data → Strategy Logic → Trade Decision → Execution

For example, a simple moving average crossover strategy:

  • Data: Stock price and two moving averages (fast and slow)
  • Logic: If fast MA crosses above slow MA, buy. If it crosses below, sell.
  • Decision: Generate buy/sell signals
  • Execution: Place orders through a broker

What Algo Trading Is NOT

Let's clear up some misconceptions:

  • Not a guaranteed money printer — Strategies can and do lose money
  • Not just for institutions — Retail traders can build and run algorithms
  • Not always complex — Simple strategies often outperform complex ones
  • Not set-and-forget — Requires monitoring and adjustment

The Retail Reality

Institutions have advantages:

  • Faster data feeds
  • Better execution infrastructure
  • Teams of quants and developers
  • Exclusive market data

But retail traders have advantages too:

  • Flexibility to change strategies quickly
  • No reporting requirements to investors
  • Can trade smaller, less liquid markets
  • Lower regulatory overhead

What You Need to Get Started

To start with algorithmic trading, you need:

  1. A strategy idea — A hypothesis about market behavior
  2. Historical data — To test your idea
  3. A backtesting framework — To validate the strategy
  4. Execution platform — To run the strategy live

That's it. You don't need a PhD in mathematics or millions in capital.

Next Steps

Now that you understand what algorithmic trading is, the next chapter will dive into the gap between retail and institutional traders — and how to think about competing in this space.

Key Takeaway: Algorithmic trading is about systematizing your trading decisions with code. It's accessible to retail traders, but requires realistic expectations and proper testing.