Algorithmic Trading - What Is It Exactly and How Does It Work?

Have you heard about algorithmic trading but don't really understand exactly what it is and how it works? This blog will explain to you in simple terms what are algorithmic trading, what are its advantages, and how it works in practice to generate profits. We will learn about the principles behind algo trading, understand what are the steps in creating an algorithmic trading strategy, and review some of the advantages and challenges with this method. In addition, we will see how Optima's innovative platform makes algorithmic trading simple and accessible for any trader or investor, without the need for technical knowledge or coding. If you are interested in better understanding what is algo trading and how it works, this blog is the perfect place to start. Worth reading for any beginner or experienced investor looking to expand their knowledge in this field.
Written by
Alec Whitten
Published on
17 January 2022


What is algo trading?

Algorithmic trading is a trading method based on computer algorithms that analyze financial data, identify patterns, and automate the execution of buy and sell orders.

Unlike manual trading which relies on human decision making, in algo trading the algorithm determines when to enter and exit trades based on pre-defined rules.

Benefits of algorithmic trading:

  • Speed and efficiency - Ability to analyze large amounts of data in real-time and execute at high speed.
  • Consistency - Operates according to defined rules without emotional influences.
  • Full availability - Can operate 24/7 without interruption.
  • Objective decision making - Based on statistical analysis of data.
  • Ability to optimize and continually improve the algorithm.

Optima's technology allows creating advanced algorithmic trading strategies while leveraging AI and machine learning tools to analyze real-time market data. In addition, the platform provides an intuitive user interface for creating, testing and implementing trading strategies. Optima is an ideal tool for traders looking to leverage the full potential of algorithmic trading.

How algo trading works

Data analysis

Trading algorithms are based on analyzing historical data like asset prices, trading volumes, technical indicators and more. The algorithm examines the data, identifies patterns and discovers potential trading opportunities. The more data it has, the more accurate the algorithmic model will be.

Decision making based on rules

Based on the data analysis, the algorithm defines clear trading rules that will determine when to enter or exit positions. For example, a rule might be "If price rises 5% above the 50-day moving average, buy". The rules are defined by the algorithm developer.

Automated execution

Once the algorithm determines that market conditions meet the predefined trading rules, it will automatically execute the action without human intervention. This allows maximizing speed and efficiency.

Optima's innovative platform enables full automation of algorithmic trading strategies, from direct implementation in the trading account to actual execution of transactions. Optima provides an automated, efficient solution for fully leveraging algorithmic trading capabilities.

Steps to create an algo trading strategy

Collect and process historical data

The first step is collecting relevant historical data like asset prices, trading volumes, technical and fundamental indicators. The more data there is, the more accurate the model will be. The data is processed and cleaned for the next step.

Build trading model and rules

At this stage the algorithm examines the data, identifies patterns and discovers potential trading opportunities. Based on these insights, the trading rules guiding decisions are built. For example: "If price rises by X%, buy".

Testing and optimization

The model and trading rules undergo a process of testing and optimization on historical data to ensure they are indeed effective and profitable. If needed, they are iteratively improved.

Real-time implementation

After the development and validation process, the strategy is implemented on live market data. Optima enables automated deployment and execution of algorithmic trading strategies directly to the trading account, with performance monitoring and continuous optimization.

Advantages of algorithmic trading

Fast and consistent decision making

Trading algorithms are capable of analyzing massive amounts of data and making decisions within split seconds. This is unlike manual trading which requires much more time for analysis and decision making. Also, the algorithm operates in a systematic, consistent way according to pre-defined rules.


Trading algorithms operate without emotional influences like anxiety, hesitation or greed, unlike manual trading. This ensures rational, objective decision making.

Ability to analyze huge amounts of data

Trading algorithms can process and analyze enormous amounts of data at once that a normal human cannot grasp. This gives them a significant edge in pattern detection.

Constant optimization

Algorithms can be continuously improved and refined based on performance and results. Optima offers advanced tools for constant optimization and learning of trading strategies to achieve optimal outcomes.

If you are looking to leverage the full potential of algorithmic trading, Optima is the ideal tool for you. The innovative platform allows you to easily build, test and implement advanced, automated trading strategies while harnessing the power of AI and machine learning.

Challenges in algo trading

Requires technical skills and experience

Developing high-quality algorithmic trading requires extensive experience and in-depth knowledge in areas like mathematics, statistics, computer science and financial markets. This can pose a challenge for non-technical traders.

Risk of overfitting

Overfitting happens when the algorithm fits itself too closely to the training data and loses the ability to generalize to new data. This requires special attention in the model development process.

Need for constant updating

Since markets are continuously evolving, constant updating of trading algorithms is required to maintain optimal performance. What worked in the past will not necessarily continue generating returns in the present. A trader who does not regularly check and update their strategies can expect a decline in performance.

Optima offers advanced tools for automatic optimization and updating of trading strategies based on actual performance data. Strategies can be continually refined to maintain winning outcomes over time.


Algorithmic trading offers many advantages like speed, consistency and massive data processing capabilities. However, developing and implementing quality algo strategies requires experience and technical expertise.

Fortunately, Optima provides a unique solution that enables any trader to benefit from the advantages of algorithmic trading without facing the technical barriers. The innovative platform allows you to easily build, test and deploy automated, advanced trading strategies with ease and simplicity, no coding knowledge or complex algorithms required.

Optima makes the potential of algo trading accessible and easy to harness for every trader and investor. I highly recommend trying this advanced platform to maximize the capabilities of algorithmic trading.

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