Chapter 5. Algorithmic Trading

Algorithmic trading is defined as the buying and selling of financial instruments using predefined rules called algorithms. Traders use predictive modeling, time series modeling, and machine learning to predict the price, return, or direction of movement of the asset.

Algorithms are developed by quantitative traders or quantitative researchers and tested on historical data. Algorithms go through rigorous testing before they are used for live trading. Technical indicator-based trading can also come under algorithm trading if it is fully automated. However, sometimes quantitative traders also use fundamental data such as market capitalization, cash flow, debt to equity ratio, and so on to define rules for algorithms. People are free to use any technique to define rules for algorithms. Very recently, investment or trading firms have started to dive deep into machine learning methods to predict price, return, or direction movement.

I will be covering machine...