There was a time when the trading rooms were full of traders who placed buying and selling orders with loud gestures and loud words. Today, calm has been restored. Transactions are done through a trading algorithm, all behind a computer.
What is a trading algorithm?
An algorithm is basically a method that is used to solve a problem. It consists of steps to follow, one after the other. It is said that it is correct if each input data produces the right output. It always ends after a finite number of steps.
The quality of an algorithm is determined by the accuracy of the results obtained, its performance in the use of available resources, and the time it takes to process all the data.
Algorithm and Risk Management
Trading is an impressive amount of multi-billion dollar international financial transactions. At present, most transactions are done without staff, offices or telephone calls. Some traditional traders have become "high frequency" traders who use very powerful computers, able to send orders at high speed to generate profit even on small spreads on a value. This trend is increasing because of the economic context in which margins are decreasing and the need to increase the number of transactions.
The trading algorithm allows computer-directed management that will react to the slightest market rush for buying or selling. If the first benefit lies in the speed at which transactions take place, the second is related to risk management. Indeed, the computer is less subject to error than the human. It is not subject to the emotional reactions that certain market movements can cause. A computer will never give way to panic.
Trading algorithms are the result of ongoing data collection and analysis of financial market data. They are thus constantly evolving and traders are gradually being replaced by engineers specialized in algorithmic coding.