The Concepts and Examples Explaining the Basics of Algorithmic Trading

Most of the trades are executed based on technical analysis. Typically, this analysis involves watching out for market indicators. The indicators are nothing more than a mathematical function indicating the volume and/or of an asset.

When it comes to solving math problems, computers are much quicker and accurate than us humans. So, wouldn’t it make sense to tell computers the rules of the game and let them trade for you? Well, you can do that now with algorithmic trading.

What Is Algorithmic Trading?

Often referred to as algo-trading, algorithmic trading involves the use of computers or automated software to trade the financial markets. Once it has been setup, the automated trading system trades automatically and independently from the trader while keeping a watchful eye on the market indicators.

With a computer trading for you, it becomes much easier to trade the stock market.  All you need to do is create a strategy and enter its parameters in the software. The software or automated stock trading app will take care of the rest. Using the set of instructions defined to it, the software executes the trade to generate profits at a speed and frequency that is impossible for any human trader to achieve.

Here is example to show how algorithmic trading works. Suppose a trader sets the following criteria for trading:

  • Buy an X number of shares of a stock when its 30-day moving average exceeds the 150-day moving average
  • Sell the shares when its 30-day moving averages goes below the 150-day moving average

The automated trading software will monitor the stock price automatically using the above instructions. It will then execute the buy and sell orders when the criteria for trading are met. This relieves the trader from having to keep an eye on graphs and live prices or from executing the orders manually. Instead, AI stock trading software does this automatically by appropriately identifying the trading opportunity.

Now that you have a basic understanding of the concept, we can move onto the most common algorithmic trading requirements and strategies.

The Requirements for Algorithmic Trading

A multi-disciplinary field, algorithmic trading needs traders to fulfill some requirements before they start using an AI stock trading software. These requirements are discussed below:

Trading Strategy

While trading skills are not that important in algorithmic trading, you do need to have a trading strategy. What does the strategy need to include? It needs to include clearly defined rules for entering and exiting trades, applying stock losses, and taking profits. It also needs to include strategies for managing risk and portfolio. This includes a strategy that decides which assets to take and provisions to deal with unexpected events. Additionally, you should also plan for minor things such as timings, exchanges, programming etc.

Programming Skills

While you don’t need to an expert programmer, a basic understanding and prior exposure to programming languages will benefit you greatly in trading. You can use several languages to code your trading strategy.  The most popular programming languages among algo traders are R & Python. This is because they are supported by many trading software and have vast libraries.

Getting Acquainted with the Different Chart-Based Strategies

An AI stock trading software can automate everything from technical analysis to on-demand execution of trades for you. However, it will still help to acquaint yourself with the different chart-based techniques and strategies that you can apply in the markets to trade profitably.

Today, you will find many automated trading systems that are equipped with advanced charting features and analytics. By understanding the different chart-based techniques and strategies, you will be able to make the most of these charting features and analytics.

In addition to the above, you may also need back-end infrastructure and co-location facility, and approvals from the regulatory bodies before you can start algorithmic trading. With the requirements understood, let’s move onto some of the most common strategies involved in algorithmic trading.

The Algorithmic Trading Strategies

An automated stock trading app enabled by intelligent algorithms is smarter, faster, and more efficient than any human trader ever. By using the following algorithmic trading strategies and automated stock trading app, you can take your trading to the next level:

#1 Trend Following

An algorithmic trading software can help investors to grow their wealth. It can do this by making use of indicators like momentum, averages, stochastics, etc. to trigger a buy-and-sell order. Following these indicators or trends to place a trade is one of the most common algorithmic trading strategies.

#2 Arbitrage

This algorithmic trading strategy involves the buying and selling of a stock listed on two separate markets. The stock is bought at a lower price in one market and sold at a higher price in the other. This eliminates the risk associated with the trade. Here is an example to explain this.

Say, you find a Rolex watch priced at USD $6000 in the U.S and USD $4000 in the Philippines. What action would you take? If you’re sensible enough, you would buy the watch in the Philippines and sell it in the U.S. This way you will earn the spread between the two countries. This allows you to get a profit at no risk and zero cost. In the same way, algorithmic trading can alert you to take advantage of any price difference in the financial markets.

In addition to the above, there are some other commonly used algorithmic trading strategies. These include index fund rebalancing, mathematical-model based strategies, percentage of volume, and implementation shortfall.

Using proprietary algorithmic intelligence (AI) for trading, a true algorithmic trading software learns from the past, adapts to market conditions, and makes trade decisions accordingly. This results in lower investment risk and increased chances of profitability.

A self-made entrepreneur, Randy Tate built an athletic apparel company that grew to over $5M in revenue. Over the past decade, he has been training employees and business owners on how to market effectively, grow sales, and bring sustainable growth to their companies. Tate has an enviable list of accomplishments to his name including starting a software company that reached over 150,000 users, developing and overseeing the expansion of the Elite Business Education curriculum program, and co-founding iFlip, a SAAS Financial Technology Company empowering individuals to preserve, protect, and grow their wealth through AI investing.