An algorithm is a logical mathematical angle that when used correctly will solve a problem. For our uses, the trading algorithm will mathematically solve the stock market by following a specific formula or procedure that takes the human element out of stock trading. By creating a mathematical formula you can rule out: whims, gut feelings and other emotions that a trader may have when entering or remaining in a trade.

One simple algorithm that is often used by large companies and hedge funds is to buy stock shares through a series of smaller trades. If a company was to purchase a large order of shares, it would be noticed by other traders and would artificially drive up the price of the shares. This is a non intrusive form of algorithm designed with a specific purpose. They are called VWAP’s which stands for volume-weighted average price.

We know VWAP’s are in use often and are used for the large purchase of stock. Large purchases of stock will drive up the shares price even when purchased in smaller blocks. If a trader was able to develop an algorithm that could figure out what shares VWAP’s were purchasing as they were just starting in on a buy. Then a trader could essentially buy up a bunch of shares and sell to the VWAP’s later at a higher price. There are algorithm’s currently doing this exact thing, or at least attempting to every day in the stock market.

If traders can track and predict a VWAP’s action, then a trader could also use an algorithm to create what looks like VWAP buying. This is an algorithmic play on “spoofing”.A smart trader would buy shares of a company and then try to drive the price of the stock up by placing a bunch of large buy orders that were priced just below the stock price. Traders and algorithms alike would notice the action and strong support at a specific price and begin to purchase the stock themselves. The “spoofing” trader would sell into the buying and cancel all the fake buys quickly.

These are algorithms that try to manipulate the market fraudulently for their own gain. There are other algorithmic traders who buy and sell stocks daily when a stock meets a specific criteria that is preset in their theories. Attempting to gain the upper-hand in the volatile world of stock trading.

• Previous Entry: Is There A Safe Way to Trade Penny Stocks?
• Next Entry: Forex Market Hours