What is an algo order?

In algorithmic trading (black-box trading), a computer program executes a deal based on a predetermined set of guidelines. Algorithms can execute trades with a rate and regularity that would require more work for a human trader in theory.

Investors of all levels can use algo orders. They make markets more liquid, trading more methodical. 

What is an algo order?

An algorithmically generated order, or "algo order," is a type of trade or investment instruction created by a computer program or system rather than a human trader. Algo orders are designed to execute trades automatically based on predetermined rules or conditions coded into the algorithm. These rules may be based on various factors, including market prices, mathematical models, timing, and quantity.

Algo orders are often used in high-frequency trading and other fast-moving markets, where speed and accuracy are critical. They are suitable for all investors and can be applied to high-risk trades. 

They can also be programmed to execute trades in real time or on a delayed basis. Algo orders are often used to execute large trades or make many small trades quickly and efficiently.

Even though algo trading executes trades at a higher frequency, it still needs to be monitored by human users. This is because the algorithm cannot make adjustments based on qualitative factors like investor announcements or even company partnerships, which could positively impact the price of an asset.

How algorithmic trading works

Trading Work

Here is an overview of the process of algorithmic trading:

  • Developing the algorithm: This involves designing the rules or criteria that the algorithm will use to determine when to buy or sell a particular asset. This can include factors such as the moving average of a stock's price, the volume of trades being executed, or the relative strength of a particular asset.
  • Backtesting: Once the algorithm has been developed, it can be tested on historical data to see how it would have performed in the past. This allows traders to know how the algorithm would have responded to past market conditions and make any necessary adjustments.
  • Live trading: Once the algorithm has been developed and tested, it can be implemented in live trading. The algorithm will continuously monitor the markets and execute trades according to the rules it has been programmed with.
  • Monitoring and adjustment: It is essential to constantly monitor the algorithm's performance and make necessary adjustments to improve it. This can involve adjusting the algorithm's rules or criteria or modifying how it executes trades.

Algorithmic trading tools

Trading Tools

There are various tools that traders can use to implement algorithmic trading strategies and execute algo orders.

  • Stop-Limit: A stop-limit order is an order to buy or sell a security once the price reaches a specified range, known as the “stop price.” Once the stop price is reached, the stop-limit order becomes a limit order, meaning it will only be executed at the limit price or better. A stop-limit order can be a risk management strategy to protect against potential losses. For example, if a trader has a long position in a stock and wishes to restrict their potential losses if the stock price falls, they can set a stop-limit sell order at a specific price. If the stock price falls to that level, the stop-limit order will be triggered, and the trader's position will be sold at the limit price.
  • Trail order: A trail order adjusts a trade's stop price as the market moves in its favor. In algorithmic trading, trail orders can lock in profits on a trade as the market moves in the trader's favor. The stop price is adjusted by a set amount or percentage, known as the “trailing amount,” as the market moves in the desired direction.
  • Iceberg Order: An iceberg order is a type of algo order used to hide the actual size of a trade from the market. With an iceberg order, only a small portion of the total order is displayed on the order book, while the remainder is executed in smaller chunks over time. This can be used to conceal the actual size of a trade and avoid moving the market against the trader. This algo order can help execute large trades without tipping off the market. 
  • Time-weighted average price (TWAP): This trading strategy aims to execute a large trade over a specific period at an average price as close as possible to the underlying market's average price during that period. It is a type of algo order that can be used to execute large trades to minimize the impact on the market.
  • Advanced Limit Order: An advanced limit order is a type of order that combines the features of a limit order and a market order. With an advanced limit order, the trader specifies a limit price at which they are willing to buy or sell an asset and a time-based trigger determining when the order should be converted into a market order. 
  • Post Only: This order can be used to avoid taking liquidity from the market. Execution will occur only if the limit price is not immediately reached. This means that if the order can be immediately filled at the limited price, it will not be executed and will be added to the order book as a resting order.
  • Fill-or-kill (FOK): FOK advanced limit orders can be used to ensure that trades are executed at a specific price.
  • Immediate-or-cancel (IOC): This order must be immediately filled at a limited price, or any unfilled portion of the order will be canceled. This means that if the order cannot be immediately filled in its entirety at the limited price, any remaining portion of the order will not be executed and will instead be canceled.

A word on algo orders

While executing algo orders during trades, it is important for traders to carefully consider the risks associated with trading standardized options and steps to mitigate these risks as much as possible. This may involve seeking out education and training resources to develop a deeper understanding of the risks of standardized options and how to manage them. 

Algo orders might make trading safe, but the process still involves high risk. Therefore, traders should have adequate knowledge of trading techniques and a proper understanding of executing algo orders before trading. 


What Does Algo Mean in Trading?

“Algo” is short for “algorithm,” which refers to using computer programs to execute trades based on predefined rules or criteria. It uses algorithms to analyze market conditions, identify trading opportunities, and execute trades automatically. 

What Does Algos Stand For?

Algos is plural for “Algorithm.” In this case, algorithms can place trade orders and trade automatically to get more efficient results. 

Does Algo Trading Actually Work?

Yes, algorithmic trading works. A trader has higher chances of success if they employ a technique subjected to exhaustive testing. For most traders, the quantifiability and testability of algorithmic trading rules make them prefer it to trading on their own.

Is Algo Trading Safe?

When done by someone who is well-versed in the relevant systems, market conditions, trading methods, and even the necessary coding skills, algo trading could be safe.

Is Algo Trading Always Profitable?

In the right circumstances, algorithmic trading can yield massive gains. Traders using algorithms must be thoroughly familiar with the markets, the tactics they employ, and reliable backtesting capabilities to assure the safety of their trading systems. With these done, there is a higher chance of making profits.

Related articles
View more