How long do you think one takes to evaluate this expression?
260 x 252 - 721 = ?
No matter how fast one can calculate the expression, one cannot solve it faster, more reliably, and more accurately than a computer. This is the fundamental concept of algorithmic trading: making use of computing power to perform tasks in which computers outperform humans’ capabilities
Algorithmic trading is using a computer system to carry out fully automated trades according to pre-programmed algorithms.
A trading algorithm is a concrete investment strategy in a set of execution statements to make trading decisions. It also determines what to buy or sell, at what price, and in how much volume and in which order type.
An algorithmic trading system automates all data collection processes, and data queries and uses computer algorithms to make trading decisions and reports, to manage real-time financial portfolios without any human intervention.
- Query data. An algorithmic trading system can automatically update the latest information on the price and volume of all stocks in companies listed on all 03 stock exchanges in Vietnam, namely HOSE/HNX/UPCOM every 02 seconds, and it can query data at all times. This is a huge competitive advantage for investors who want to exhaust existing opportunities in the market.
- Make trading decisions. The system automatically makes trading decisions after each data update. A high-frequency trading algorithm can make thousands of trading decisions every day.
- Place investing orders. After making a trading decision, the algorithm can place or cancel trading orders to the investor’s account. It is possible to successfully place trading orders as fast as 50 milliseconds in the Vietnamese stock market.
- Report trading results. The system can report signals and results of placing/executing/canceling orders in real time. Simultaneously, it constantly updates the account status and summarizes trading results. In addition, it reports bugs in real-time to improve reaction time and resolve technical problems.
- Manage financial portfolios. After updating the portfolio, the change in the trading position will affect subsequent trading decisions. Portfolio management gets more complex as the trading system operates on both the stock market and the derivatives market.
If there’s no delay in order matching, all the steps above can be completed in 2.5 seconds by a computer system, compared to manual operations which can take over 30 seconds.
Thanks to the algorithm process, the strategy can be consistently executed on a large number of transactions, eliminating human biases (emotional biases and cognitive errors), thus following the law of large numbers to assess the effectiveness of trading strategies.
It’s important to note that the investment performance mainly depends on the algorithm design. A poor investment strategy will only lead to automatic losses when put into an algorithmic trading system.