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Algo Trading Software: What Is Algo Trading?

The accepted wisdom these days is that people ought to save around 15 percent of their pre-tax earnings for retirement. Of course, that advice is a little opaque, because they mean you should invest that in a retirement account that will earn returns for you.

Let’s say that you already max out your retirement account every year and have disposable income you’d like to invest. A lot of finance types recommend a stock market account, but many people end up buying or selling based on knee-jerk reactions. Enter algo trading software.

Never heard of algo trading before? Keep reading for our algo trading guide.

What Is Algo Trading?

In essence, algorithmic or algo trading involves stock market purchases or sales based on a set of pre-defined rules. As a very basic example, an investor might want to invest in Alphabet Inc, Google’s parent company.

Let’s say that Alphabet trades at $112 per share most of the time. You might set a rule that you will buy 1000 shares if Alphabet drops below $109 per share. On the flip side, you might also set a rule that you’ll sell if shares go above $120 per share.

By setting specific rules, you make $11,000 minus any fees and taxes.

Algo Trading Software

Of course, no stock broker or brokerage firm can possibly keep track of all of these rules manually. For that matter, most investors can’t manually keep track of them either if they invest in more than a few individual stocks through an online brokerage.

Instead, you use algo trading software. Once you set up a trading strategy, you can input the parameters of those strategies into the software. The software will then execute the trades on your behalf.

Not sure how to develop a strategy? Learn more about that at kjtradingsystems.com.

Benefits of Algo Trading?

Algo trading offers several benefits for stock brokers and for individuals. For one, it helps eliminate emotional buying and selling. If you set the conditions for purchases and sales in advance, you stop worrying about breaking news that probably won’t mean anything tomorrow.

Algo trading is also faster. It happens automatically, rather than waiting on you or your broker to input the trade.

You also avoid basic human errors, like inputting the wrong numbers or selecting the wrong stock.

Most algo trading software allows for backtesting your strategy against historical data as well as current market conditions. You can see in advance whether your strategy will likely prove profitable or not.

Algo Trading and You

Algo trading is another approach to stock market investing that can make your life easier and improve your stock market results. Instead of relying on instincts or gut reactions, you can create rules for when you buy or sell a given stock. Then, the algo trading software executes trades based on those rules.

This approach allows for faster, more accurate trades that don’t suffer from human error. It also largely eliminates the emotional buying or selling that gets people into trouble.

Looking for more financial tips or insights? Check out the Finance posts in our Business section.

Red Note: 30 September 2022

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