Algorithmic trading is gaining popularity among traders, enabling them to set predetermined parameters and algorithms for their trades; minimizing the time, risk, and stress of manual trading.
According to research by ’’Economic Times’’ , algorithmic trading is the future of the financial markets. Algorithmic trading, often referred to as algo-trading, nowadays growing its scope and becoming more preferable between traders, since it is much faster and accurate. Providentially, with major technical improvements, algorithmic trading is now accessible for all types of traders worldwide.
What is Algorithmic Trading?
Algorithmic trading is a process of executing orders using advanced mathematical tools, as chart analysis and computer program codes, that follows a defined set of instructions, for variables such as time, price and volume, in order to enter and exit trades. Instantly after the market conditions match any calculated and predetermined criterias, trading algorithms place a trade on the traders’ behalf.
The trade can generate profits at a speed and frequency that is exceeding normal human abilities, by this way it enables the system to take advantage of any profit making opportunities before a human trader can even spot them. Apart from profit making opportunities, algorithmic trading makes trading more systematic, by eliminating human error which may occur from being not detail-oriented, lack of focus may be a cause of working long hours, stress etc., on trading activies.
Frequencies of trading: HFT, MFT, LFT
There is a clear velocity level at which trade takes place. The amount of profits generated per second is determined by this pace.
- High-Frequency Trading (HFT) – This type of trading leads to high-speed trading, which means that vast quantities of orders are executed in fractions of a second, making trading highly profitable.
- Medium-Frequency Trading (MFT) – the holding period of MFT is in the range of few minutes to a day and thus is slower than HFT.
- Low-Frequency Trading (LFT) – LFT takes between a day and a couple of weeks in order to place trades and is considered to be the slowest type of trading.
Algorithmic Trading Strategies:
Any strategy for algo – trading mainly requires identifying opportunities that are profitable in both ways: for increased profits and for cost savings.
Common trading strategies used in algorithmic trading include the following:
- Mean Reversion
Operating based on the assumption that the markets are ranging 80% of the time, this strategy effectively positions trades in expectation of the present price returning to the calculated market price, by estimating an average price based on historical data.
Using Artbitage strategy in algo-trading means finding price imbalances in different market and profiting out of them. As an example, triangular artbitrage is one of mostly used arbitrage strategies for high profits, which involves two currency pairs and a currency cross between two of them. Yet, since the currency differences in FX are usually in micropips, the trader needs to trade with large sizes in order to make considerable profits.
- Trend Following
Trend following is one of the simplest among algorithmic trading strategies, which simply requires tracking and following market trends, with buy and sell orders based on technical conditions. Also, in this strategy the historical data can be taken into account in order to predict the future movements of the trend.
- News Based
In this kind of profitable, but also high – risk possibility algo-trading strategy, it is vital for the trading system to be hooked to news wires, automatically generating trade signals depending on the results of the comparison of the market consensus with the previous data.
- Market Sentiment
In substance, the process of market sentiment strategy means that a system observes a specific product and detect its extreme short and long positions. It basically takes into consideration people’s current opinions and assumptions towards the given product. Either by using COT (The commitments of Traders) or by scanning social media, it collects the information and biases towards the specified product.
Technical requirements for Algorithmic Trading:
The following are the requirements that must to be met before diving into the world of algo-trading:
- Knowledge of computer programming languages in order to run the algorithms; to purchase a ready software; or hiring programmers to develop the algorithms for you.
- Strong and fast internet connection.
- The ability to backtest the system once it is developed to ensure that the program runs smoothly.
- Access to the live data from different markets.
- Instant access to trading platforms for placing orders.
- Having historic data to test the algorithms on.
Main benefits of algorithmic trading:
Algorithmic trading has many benefits, but the main ones include:
- Trades are executed at the best prices available in the market;
- Instant and accurate trade order placement, avoiding price changes;
- Reduced transaction costs caused by the absence of human intervention in the process;
- Less risk of manual errors while placing the trades, as it often happens in manual trading;
- Reduced the possibility of mistakes done in manual trading due to psychological factors.
Trading can be overwhelming at times, but we hope this article has clarified for you how algorithmic trading works. Algorithms have gained popularity between traders, as these mathematical algorithms became good helpers for traders, by identifying benefiting opportunities and turning the found information into trading decisions. Yet, the best part of it is that it is your decision on how you want to use the algorithmic trading strategies for making the best out of your trades. If you feel curious to start trading and try automated trading strategies, feel free to reach us to open an account in the latest version of MetaTrader trading platform MT5 and dive into the trading world.
Wishing our readers a great and profitable week!