# Algo-Trading Meaning, Basics, and Example

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A human trader will find it very challenging to generate profits at the rate at which an algo-trader does. The algo-trading computer follows instructions based on mathematical models and constitutes a number of metrics like price, time, quantity, etc. The trader finds the precise metrics by carrying out backtesting. Backtesting involves evaluating a trading strategy by finding its efficiency based on historical data. Backtesting can also be performed with the help of a computer program.

To develop a more comprehensive understanding of algo-trading, let us look at an example.

Let us assume that, from backtesting, a trader finds that the stock price of a particular stock generally begins an upward trend when the 20-day moving average cuts above the 50-day moving average. The trend reverses when the same 20-day moving average cuts below the 50-day moving average. So, an algorithmic trader creates a trading algorithm based on the behaviour of two simple moving averages. The first moving average is the 20-day moving average, and the second is the 50-day moving average.

The algorithm places a buy order to buy 100 shares of a stock when its 20-day moving average cuts above the 50-day moving average.

2. Selling Order Instruction

The algorithm places a sell order to sell 100 shares of a company when the 20-day moving average crosses below the 50-day moving average.

For the sake of simplicity, in the above example, the algorithm placed orders based on one specific condition: the behaviour of two moving averages. However, a well-constructed algorithm would consider several conditions before placing orders. High-frequency trading (HFT) is one of the most common algo-trading examples you will find in the real market. This algo-trading strategy places multiple orders at rapid speeds based on multiple metrics across many markets.

## Technical Requirements for Algorithmic Trading

Now that you know about algo-trading basics, let us learn about the technical requirements you must possess to start algo-trading. An algorithmic trader uses backtesting to identify recurring trends in the price of multiple securities in the past. Then, they construct a set of rules based on their recordings to automate their trades using computer software. Hence, if you wish to start algo-trading, first and foremost, you must have access to a computer system and be well-versed in interpreting price charts. Only if you are capable of interpreting price charts will you be able to enter the right commands to design the algorithm. Besides those, the following requirements are also essential to carry out algo-trading:

• Knowledge pertaining to computer programming and software development, or the ability to hire talent with the said skillset to program the trading strategy.
• Historical data to backtest the instructions implemented in the algorithm.
• Skill to perform the backtesting once the programme has been designed before you can utilise it in the live markets
• Live market data that the algorithm can scan to identify opportunities and execute them effectively