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What is algorithmic trading?

In one line: Algorithmic trading is when a computer program places trades automatically by following a set of written rules, such as price, time or volume conditions.

Trading glossary · Updated 2026-10-21

The short answer

An algorithm is a list of steps. In trading, it's a set of rules a computer follows to buy and sell.

"If this happens, do that." The computer never gets tired, bored or nervous. It also never thinks for itself.

A simple example

Here's a rule written in plain words:

1. If a 1-hour candle body closes above yesterday's high, buy.
2. Put the stop 20 pips below the entry.
3. Put the target 40 pips above the entry.
4. Risk 1% of the account on each trade.

A program can watch the chart and do all four steps the moment the rule is met. In units of risk, a win here is +2 and a loss is −1. A math example, not a promise. Rules like this lose often, and the program will take every loss too.

Who uses it

• Big funds split huge orders into small pieces, so they don't move the price on themselves.
• Market makers quote buy and sell prices all day. Many use speed-focused algos, see High-frequency trading.
• Individual traders write simple rules in tools like TradingView's Pine Script. Our Pine Script for beginners guide shows the first steps.

Why it matters

Writing rules down so clearly that a computer could follow them is useful even if you never automate. It forces you to define your entry, stop, target and size. That's a trading plan.

You can also test rules on past data, called Backtesting. That shows how a rule would have behaved.

A common mistake

Trusting a great-looking backtest. It's easy to tweak a rule until it fits the past perfectly. That's called overfitting. The rule then fails on new data. Past results are hypothetical and don't guarantee anything. Our strategy backtest guide covers how this goes wrong.

The other trap: buying a "bot" that promises returns. Regulators like the CFTC warn that no algorithm or AI can guarantee profits. See can AI predict the stock market?

Questions