In plain English
What Algorithmic trading means
An algorithm may follow rules based on prices, volumes, indicators, news inputs, or risk limits. For example, it might divide a large order into smaller orders or close a position once a threshold is reached. A chart alert alone is not necessarily algorithmic trading if a human still decides all order parameters and submits the order manually.
Why it matters
Automation can improve consistency and speed, but it can also repeat a flawed rule at scale. Relevant controls include testing, limits on order size and exposure, monitoring, a way to stop the system, and records of system changes. Regulatory definitions can also distinguish algorithmic trading from simple order routing.
Example
A program is instructed to buy 10,000 EUR/USD whenever a specified moving-average condition occurs, but only if the spread is below a set threshold. It automatically chooses whether to send the order and its timing based on those rules. That is algorithmic trading; the rules do not establish that it will be profitable.
Quick answers
Common questions
Is a stop-loss order algorithmic trading?+
Not necessarily. A standard stop-loss instruction by itself may be an order feature. The classification depends on whether a computer algorithm automatically determines order parameters beyond basic routing or post-trade processing.
Does backtesting prove an algorithm will work live?+
No. Backtests rely on historical data and assumptions about costs, fills, and market conditions. Live performance can differ because of slippage, latency, changing liquidity, and model errors.
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