How does algorithmic trading work?

Algorithmic trading bot identifies market inefficiencies and exploits them, potentially resulting in substantial profits. All algo trading strategies follow a set of defined rules, suppose a trader follows the below trade criteria:

  • Purchase 50 shares of a stock as its 50-day moving average rises beyond the 200-day moving average
  • Sell stock shares as its 50-day moving average dips under the 200-day moving average

These two simple instructions can be written to automatically monitor stock price (and the moving average indicators) and place the buy and sell orders when the defined conditions are met. This simple algorithm is much more efficient than a trader who would monitor the live prices and graphs, or place orders himself.