Purpose

• The stock market exists for two primary reasons. The first is to fund corporations. When a company becomes public, it sells shares for the purpose of raising large capital to fund further projects or services. Overnight, a company can suddenly have billions of dollars of equity investments at its disposal. The second primary purpose is to reward the investors that purchase these shares. Shareholders participate in a company with the hopes that their investments will yield a reward. The stock market gives investors this opportunity to see their shares rise in price. The field of stock market analysis and algorithmic trading is designed to provide some shareholders an edge in predicting the move of share prices so they have greater chances of profitability.
  
  

Mechanism

• Stock market analysis, also known as "technical analysis," is the process of deriving patterns from price movement. Unlike fundamental analysis, which analyzes economic forces, technical analysis seeks clues only from charts. This process is well-suited to forecasting algorithms, which are computer programs designed to analyze the stock market automatically. As technical analysis is often based on complex mathematics and other objective numerical data, a computer can be programmed to quickly identify repeating patterns or conditions. The programs are then tied to brokerage accounts or directly to a stock exchange to process stock trades automatically when the algorithm finds a probable outcome.
  
  

Dow Theory

• The Dow Theory is a foundation of technical analysis that originated more than 100 years ago. The concepts of the theory are simple, but their implications are far reaching and are often involved in even the most sophisticated algorithms. The Dow Theory is a system for objectively defining a "trend." It simply states that a stock is in an up trend if it presents a series of "higher highs and higher lows," and in a down trend with a sequence of "lower lows and lower highs." Price action cycles up and down repeatedly, but when the up moves result in new high prices with subsequent declines that end higher than previous declines, then prices are trending. Identifying these trends and turning points is the key focus of any algorithm.
  
  

Players

• Forecasting algorithms that automatically analyze the stock market are present on a wide variety of scales and platforms. Among the most widespread and least complicated are the algorithms provided to individual "retail" stock market players. These are the everyday consumers who may not know much about the stock market but want some help from programs they install on their own personal computers. Many online brokerage services offer algorithms as a free service to clients. Much more complicated and aggressive algorithms use large networks of supercomputers to process large volumes of stock transactions in micro-seconds. These "high frequency trading" programs became particularly influential in Wall Street firms during 2008, and they use many sophisticated algorithms to make instantaneous predictions on market behavior.
  
  

Advantages

• Algorithmic trading can benefit stock market participants in many ways. The forecasting techniques may be able to spot trends and patterns more quickly than any individual person could. This may result in a more favorable entry price. Additionally, computerized trading removes the emotion from the process. Human traders can become very attached to individual trades due to fear of losses. When all trading parameters are turned over to a computer, human interaction is removed and the process is particularly objective. Finally, some automated trading algorithms can trade all the time on their own. This leaves individuals free to spend their time in other ways.