# Trading Algorithms Examples: How They Work And What You Need To Know

## Introduction

Are you interested in trading algorithms? These computer programs are designed to help traders make better decisions by analyzing data and making predictions about future market trends. In this article, we’ll explore some of the most popular trading algorithms and how they work. Whether you’re a seasoned trader or just starting out, understanding these algorithms can help you make more informed investment decisions.

## Moving Averages

One of the most commonly used trading algorithms is the moving average. This algorithm calculates the average price of a security over a set period of time, such as 20, 50, or 200 days. Traders use this algorithm to identify trends in the market and determine when to buy or sell a security. For example, if the current price of a security is higher than its moving average, it may be a good time to sell.

### Example

Let’s say you’re analyzing the stock of XYZ Company. You notice that the 50-day moving average is \$100, while the current price is \$110. This suggests that the stock is overvalued and may be due for a correction. Based on this information, you might decide to sell the stock or wait for a price drop before buying.

## Bollinger Bands

Another popular trading algorithm is Bollinger Bands. This algorithm uses a moving average as well as a standard deviation to create a band around the current price of a security. Traders use this band to identify when a security is overbought or oversold. When the price reaches the upper band, it may be a good time to sell, while a price at the lower band may suggest a good time to buy.

### Example

Let’s say you’re analyzing the stock of ABC Company. You notice that the current price is at the upper Bollinger Band, which suggests that the stock is overbought. Based on this information, you might decide to sell the stock or wait for a price drop before buying.

## Relative Strength Index

The Relative Strength Index (RSI) is another popular trading algorithm that measures the strength of a security’s price action. This algorithm uses a scale of 0-100 to indicate whether a security is overbought or oversold. When the RSI is above 70, it suggests that a security is overbought and may be due for a correction. Conversely, when the RSI is below 30, it suggests that a security is oversold and may be due for a rebound.

### Example

Let’s say you’re analyzing the stock of DEF Company. You notice that the RSI is currently at 80, which suggests that the stock is overbought. Based on this information, you might decide to sell the stock or wait for a price drop before buying.

## Fibonacci Retracement

The Fibonacci Retracement algorithm is based on the Fibonacci sequence, a mathematical sequence in which each number is the sum of the two preceding numbers. Traders use this algorithm to identify potential support and resistance levels in a security’s price action. The algorithm creates horizontal lines at certain levels based on the Fibonacci sequence, which can help traders identify potential entry and exit points.

### Example

Let’s say you’re analyzing the stock of GHI Company. You notice that the stock has been in a downtrend and has recently retraced to the 50% Fibonacci level. This suggests that the stock may find support at this level and could be a good entry point for buying.