Automated or Algorithmic trading is using computers to generate trading signals, sending orders and managing portfolio using algorithms with or without human initiation. Sophisticated electronic markets/platforms are used by the algorithms to trade in the similar fashion as done in electronic trading. The difference is that in algorithmic trading decisions about volume or size, timing and price are determined by the algorithm. Furthermore, algorithmic trading efficiently increases the universe being traded by an individual trader which is limited in electronic trading environment.
High-Frequency Trading (HFT) is a special category of algorithmic trading characterized by unusually brief position-holding periods, low-latency response times, and high trading volumes in a day. Algorithms are written so as to exploit trading opportunities which appear in very brief time periods as short as milli- or micro- seconds. The margin of each trade is small, which is compensated by fast speed and large volumes.
Quantitative trading is methodology employing advanced statistical techniques to make trading decision which can be traded either manually or electronically. With advancement in computing power, it is advantageous to implement such back-tested strategies as algorithmic trading which removes chances of human error significantly. The frequency of trade can be high or low as per the strategy.
Old Brokerage Market Model
Automated Market Model
Algorithmic Execution Model with API
Direct Market Access (DMA)
Automated trading is being welcomed and accepted by global markets. Within a short span of time, it has become a common practice to trade in developed markets and rapidly spreading in the developing economies. Here is a simple step by step guide to learn automated trading for retail traders, it will help you learn and implement the most popular types of automated trading strategies.