Algorithmic trading is a software which uses set parameters to exit or enter trades. These include price movements , volatility levels and even indicators like moving averages. Contrary to common belief , algos can lose money too. It just depends on how the parameters are set.
However since the algo can initiate trades at a speed and frequency which is super fast, the chances of generating profits become that much higher.
Algorithmic trading therefore can execute orders rapidly once a stock reaches a certain predetermined level. This is the reason why markets always pause at certain moving averages like 200 period and 50 period before collapse or sudden rise. Beware of a stock which is at these levels at the end of the day for the next trading day one can see sudden rise or collapse.
Notice the use of period here and not day . For algos are set to periods. So for example a chart set to 50 period moving average WILL show reactions at precisely at the 50 period line(up or down will depend on how the market has played out before.
Some example of 50 day period below (Will use the daily chart to show what we have discussed above)
In the chart above , the levels where the 50 day OR the 200 day are touched , are highlighted along with the last two turning points in red.
Without using elliot wave(a great tool) these levels WILL react.
Algos are being used similarly as above but with super fast speed. Whether the markets react upwards or downwards depend on the many factors , but certainly above knowledge in isolation can be helpful.