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Finance

What is High Frequency Trading?

By Luke Arthur
Updated May 17, 2024
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High frequency trading is a type of stock trading that involves placing many trades at regular intervals. This type of trading is facilitated by using advanced computers and mathematical formulas. The purpose of this trading strategy is to make small profits with many trades to increase overall profits.

High frequency trading has become more popular in the stock market in recent years. In the past, high frequency trading was not thought to be profitable over the long term. With advancements in technology, traders of the strategy have been able to become more profitable and successful.

At the heart of high frequency trading is a computer system. This is a system not based on what an individual trader thinks. A trader will not make all of the individual buy and sell decisions for this type of strategy. Instead, that process is going to be entrusted to a computer system and advanced software.

With many trading strategies, a trader attempts to place a limited number of trades and watch over each one of them carefully. With this trading strategy, the computer system is going to place a large number of trades and manage them for the investor. In many cases, the trades will be placed at intervals of less than a fraction of a second. This could result in hundreds of open trades at one time.

High frequency trading strategies can vary from one trader to the next. The trading strategies will be based on the theories and trading experience of each individual trader. The trader will program the software to trade based on the knowledge of the trader and this creates many potential trading strategies.

Many of the strategies in this category use technical indicators to determine when to get into the market. The software will analyze numerous stock charts and look for profitable trading opportunities. When an opportunity presents itself, the software will spring into action and place one order after the other.

In most cases for this strategy to be successful, the trader will need to utilize a direct access trading system. If the trader utilizes a traditional online broker, he or she may not be able to get the execution needed to make this strategy work. With high frequency trading, a trader needs to be able to get instant fulfillment of the orders placed.

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