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what-is-the-difference-between-algorithmic-and-high-frequency-tradin

Question originally asked on Quora – response below:

You’re perceiving the two as something different when they intrinsically relate to one another.

Definition of Algorithm:
“a set of rules for solving a problem in a finite number of steps, as for finding the greatest common divisor.” – Normal speak please! A set of rules for your computer to systematically and precisely carry out…

High Frequency trading: as the words allude to; trading frequently…

An algorithm explains the list of rules to follow in order to solve a problem. Algorithmic trading (which needs to be written in a programming language that a broker supports like MQL4 (metatrader 4) in Forex) can handle problems like:

  • Executing / cancelling different order types (pending and market orders etc.)
  • Position sizing / Risk Management
  • Building custom time-frames
  • Using live and historical price to create mathematical models for exploitation (signals)
  • Communicating with external news / economic data sources to utilize
  • Restricting certain hours of the day to trade
  • Tracking incoming ticks (or changes in price) to trigger signal monitoring events (e.g. entry and exit rules)
  • and much much more depending on how creative you are…

Assuming you have a statistical edge to exploit, writing an algorithm allows you to handle all the problems and more, computationally. This is obviously much faster, more reliable and efficient than a human…

High Frequency Trading refers to a methodology type in which the strategy is exploiting an inefficiency found technologically (e.g. in the infrastructure of how orders are sent and filled etc.), or say one that is of statistical arbitrage (typical examples to name two simple ones). Either way, High Frequency Trading requires algorithmically orientated logic…


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