Algorithmic Trading Strategies
Making money via trading, be it in the forex, futures, cryptocurrency, commodity, stock, or options market can be lucrative. The best part is that the market can accommodate almost everyone. Are you a day trader who thrives on minute intraday price movement? There are trading strategies for that. Do you have a large capital and you want to play the long game? There is a safe and effective investment strategy for that as well. Anyone can trade, no matter how little money they have. The only limitation is time. Introducing: algorithmic trading. Strategies are straightforward, and we will talk about that here.
- Basics of Algorithmic Trading
- Basic Algorithmic Trading Strategies
- Learn Effective Trading System with AsiaForexMentor
Basics of Algorithmic Trading
For the uninitiated, let’s start from the beginning. What is algorithmic trading? It comes in many names such as algo-trading, or black-box trading. But most traders call it automated trading, and it is just that. It involves the use of computer programs that follow instructions to trade on your behalf. In other words, you let a bot handle the work for you.
One of the best things about automated trading is that, given a good internet connection, it can place trades and generate profits at a pace that cannot be matched by any human. We are talking about speeds within milliseconds.
Trading bots like this follow a set of instructions such as time, price, quantity, and other models. Other than the obvious profit opportunities that can be made with bots, automated trading also makes trading more systematic by removing the human factors out of the equation, such as emotions. So, what does it look like in practice?
Suppose you want to purchase 100 shares of stock. You have the specific quantity for the bot now. Next would be time. Let’s say that you use two moving averages, 50- and 200-day moving averages. You want to buy 100 stocks when the 50-period moving average moves above the 200-day moving average. If the 50-day moving average moves below the 200-period moving average, you want to sell 100 shares of stock.
The steps above can be easily automated. You can set up a bot to monitor the stock price and the moving average indicator. When the condition is met, it will execute a buy or sell order with the specified quantity. After setting up your bot, you just leave it running and you can go do something else. The bot will handle everything for you. This is basically set and forget.
What are the Benefits
There are many benefits to algorithmic trading. For one, you can set up your bot so that it executes trades at the best possible prices. Keep in mind that it is much faster than a human, and it can catch that little price difference before a human can place any order. That way, it can net you more profit over time. Not only is the bot quick, but it is also accurate.
How will Bots help
All your trades would be timed perfectly, provided that you set it up properly and with a good internet connection. It helps avoid significant price changes and also reduces transaction costs. Bots can also monitor various market conditions at the same time without any noticeable impact on performance.
Without a human at the helm, there would be no human errors either. Bots reduce the possibility of mistakes by various psychological factors. There is a small chance that your finger may slip, click on the wrong button, and execute the wrong trade. Bots do not make such a mistake.
What will the Bot do
Most importantly, you can backtest algo-trading by using real-time and historical data so you know for sure if the trading strategy would be effective.
It is also worth noting that automated trading is usually employed in high-frequency trading. That means, bots are effective when large numbers of orders are needed to be placed across multiple markets. They can monitor and make trade decisions across those markets much more effectively than a human, provided that they are programmed properly. But algo-trading is not only used in high-frequency trading alone. Bots are used in various investment activities.
You can use bots for mid- to long-term investments such as stocks. Bots can purchase stocks in large quantities spread out over time so that your large-volume investment would be discrete and does not influence stock prices.
For short-term trades, bots provide automated trade execution and help create enough liquidity for sellers in the market. This is helpful in speculation-driven markets.
Systematic traders who follow trends or hedge funds can make their trading more efficient by programming in rules and conditions and let the bot monitor and execute trades on your behalf.
As you might expect, algorithmic trading is only effective when you set it up right. When it comes to setting up a trading bot to implementing your algorithmic trading strategies, Reddit recommends keeping things simple. Using too sophisticated a system or programming it wrong can be disastrous. For this reason, you should test the program first on a demo account to see how it performs before you let it loose on the real market.
Not everyone can get into algorithmic trading. You need a few things to start. First and most importantly, you need to have some knowledge of programming to create the bot to trade for you. Alternatively, you can also hire a programmer to do it for you, or buy a pre-made program. You might have to pay a premium for the best algorithmic trading software, and that’s provided that it really works.
Next would be to have an internet connection, which is a given. You also need access to market data that your program can monitor and detect trading opportunities. Just to be on the safe side, you also want to have the ability and infrastructure to backtest the bot so that you know it is working as intended.
Also read: 50 Pips A Day Forex Strategy
Basic Algorithmic Trading Strategies
There are many forms or types of algorithmic trading strategies. However, they have one thing in common. That is an identifiable and profitable trading opportunity. That can either come in the form of cost reduction or improved earnings. With this in mind, there are a number of popular trading strategies you should try out.
One of the most popular and profitable algorithmic strategies is to follow trends seen in moving averages, price level movements, and other indicators. These strategies are the easiest to implement because you do not have to make any market predictions.
Bots here execute trades when desirable conditions are met, which are straightforward to define. You do not need predictive analysis here. We have talked about this before by using the 50- and 200-day moving averages.
As you can tell, the strategy is dead simple. The bot just waits for the moment these indicators cross over each other and make the corresponding trade with the specified amount.
Also read: Parabolic Sar Tested And Explained
The idea is to buy a dual-listed stock at a low price in one market and sell it at a higher price in another market. This is possible by using stocks and futures trading since their prices tend to differentiate from time to time. For this reason, the arbitrage strategy is one of the most popular futures algorithmic trading strategies. The difference here is your profit. So, having a bot would come in handy here because it can monitor both markets at the same time and place orders immediately on both markets as soon as the price gap is wide enough.
Mathematical Model-based Strategies
There are many effective mathematical models such as the delta-neutral trading strategy that allows you to trade both options and the underlying security. This strategy works similar to the arbitrage strategies except you work with options, not futures, and the underlying asset which can be stock, commodities, etc.
Mean Reversion or Trading Range
This strategy relies on the tried-and-true phenomena that the market usually corrects itself. That means, although periods of high volatility would show higher highs and lower lows, the price usually go back to their average value periodically. With this in mind, you just need to identify and define a price range and creating an algorithm based on that so the bots can place trades when the price goes beyond the defined range.
Also read: Futures trading strategies
Learn Effective Trading System with AsiaForexMentor
As you can probably tell, bots only execute trades when certain conditions are met. This is fine for most people since they can just set one up and leave it there to do trading for them. In fact, it is a good way to make some extra cash with minimum effort. That said, while the bots are very precise in their trading activities, the profit is not very consistent.
This is because bots are just not flexible. While you are away, you may miss out on some trading opportunities that can net you a massive profit. Only experienced traders can identify such moments, but a lot of people are okay with that. They accept the downside of automated trading. They sacrificed the potential for a high-risk high-reward trading opportunity for the security and comfort of tried-and-true algorithmic trading strategies. Cryptocurrency trading, for instance, is an unpredictable market and might be better suited for professional traders.
Automated trading can only get you so far. They are effective in making trades for you while you are away. But if you are willing to put in some time and effort into trading, you will see that you can make more money trading manually. This involves reading some algorithmic trading strategies PDF or algorithmic trading books and articles. But this is not a path that everyone takes because it takes time to learn to trade, even more so to get good at it.
One Core Program
But you can largely skip the learning process by enrolling in a forex trading course. At AsiaForexMentor, we have trained many traders on the art of trading with our One Core program. We equipped them with our versatile ROI-based trading system that allows them to identify opportunities with a high probability of returns. At the end of the day, so long as you get returns on investment, you are winning, and we want to help you win.
In our One Core program, we will teach you everything you need to know about basic algorithmic trading strategies to other gimmicks so you know your way around the market. The best part is that you can apply this knowledge to any market. So, if you want to try trading in forex or cryptocurrency, you can do that with our trading system as well.