Algorithmic trading is one of the most advanced methods out there To make money in the financial market. It is widely used in higher finance by some of the leading players in the industry.
Some of the best algorithmic trading hedge funds are Rennaisance and DE Shaw techniques. This article explains what algorithmic or quantitative trading is and how to use it in trading.
What is algorithmic trading?
Algorithmic trading, often confused with quantitative trading, is The process of using software or robots to analyze and execute trades. It is widely used in High Frequency Trading (HFT), where the bot is used to open and close hundreds of trades per day.
The idea behind the algorithm is simple. rather than doing manual analysis and executing deals Robots can Easily do it in more effective method.
For example, if you rely on using moving average crossovers, you can come up with a bot that will find these crossovers between multiple assets.
While algorithmic trading is widely used by quantitative traders, the concept is now also used by ordinary people. unlike the past, Traders can now use our free drag and drop tools to create their own trading bots. Alternatively, they can purchase ready-made bots and implement them in their trading platforms.
Who is an algorithm trader?
algo dealer is person World Health Organization Specializes in using trading software to analyze and execute trades In the market. The merchant can be an independent person who does this using his account. Alternatively, the trader can be employed in a hedge fundcirculation flooror investment banker.
In most casesAlgorithmic Dealers They do not have a background in finance. Instead, they mostly have a lot of experience in mathematics and software engineering. In fact, most commercial high-frequency companies such as Rennaisance Technologies hire mathematicians and software developers.
Some of the most popular quantitative hedge funds are DE Shaw, AQR Capital, two sigmaAnd the Renaissance techniques. Over the years, these have mostly been boxes outperform traditional funds Such as Berkshire Hathaway and Pershing Square Capital.
How does algorithmic trading work
A common question is how algorithmic trading works. Concept Quantitative trading Relatively simple. work through Implementation of manual labor strategies in algorithms.
For example, suppose your trading strategy involves buying an asset when the Relative Strength Index (RSI) moves into an oversold level and when the 25 and 50 moving averages make a crossover on a 5-minute chart.
In this case, You can perform analysis manually and execute trades. On the other hand, you can It was decided to create a bot that would analyze the marketHe finds these opportunities and then executes the deals. You can select the assets you want the bot to analyze.
Related “ Over 7 things to consider when choosing the best assets to trade
When activated, the Algorithms will do the work Open trades when conditions are met. Traders determine the maximum lot or trade volume that the bot will open. them too Locate the most important Take profit and stop loss levels to use.
The pros and cons of algorithmic trading
There are many benefits to using algorithmic trading. Or not, that makes possible for one To trade for long hours Where robots can operate at all times.
Secondly, it is a file A good way to avoid slipping. Slippage is defined as a situation where the strike price differs from where you opened a trade.
Third, algorithms Do not bring emotions to the market. Instead, they do what they are programmed to do. This is important because manual traders often let their emotions interfere with their trading goals.
On the other hand, the algorithm has Several downsides.
You first need to some Technical skills to succeed in it. Secondly, since then It depends on the technology, he may miss some important stimuli such as market news. third, Bots do not perform well in certain market conditions.
What you need to succeed in algorithmic trading
There are several things you need to become a successful algorithmic trader. Let’s dwell on the most relevant of them.
Programming and trading experience
One of the most important things you need as a trader is the coding and trading algorithm. coding It is the process of building algorithms using different languages. The most popular programming languages for algorithm traders are PythonAnd the javaand Ruby on Rails.
You also need to have Trading experience. This is important because you will Translate your manual trading strategies into an automated strategy.
If you do not have either of the two, your only option is to purchase a ready-made trading algorithm.
You can search and find the best trading bots in the industry and then buy them. Alternatively, you can use marketplaces like the one offered by MetaQuotes to buy these bots.
Another useful concept in algorithmic trading is known as back testing. Backtesting is the process where you stress test your trading bot. It’s common using historical data To predict the performance of your trading bot.
Taking this test will show you whether the bot will be successful or not. Platforms like TradingView and MT4 have free strategy testers.
future test Another useful concept involves using a demo account to predict the performance of a robot.
It’s common Replay future events To measure the performance of the robot. It also uses the demo account and live data To evaluate the performance of the robot.
Risk management is defined as a process Reduce your exposure to risks in the market during Maximize returns.
There are several well-known risk management strategies that need to be incorporated into algorithmic trading. For example, the robot must It has a maximum trading volume It can be implemented. Moreover, everything deals Should be protected Using stop loss or take profit.
Algorithmic trading strategies
Quantitative trading strategies are usually the same with manual strategies. Therefore, some of the most popular algorithmic trading strategies are:
- Follow the trend – This is a strategy that identifies a trade with the current trend and then follows it well. For example, you can create an algo strategy that follows trend indicators such as moving averages and Bollinger Bands.
- reversal strategy This is a strategy that identifies current trends and then predicts when a reversal is about to occur.
- Grid Trading Strategy – This is a strategy based on placing orders above and below a certain price.
- Scalping strategy – These are bots designed to open dozens of deals per hour, making a small profit on each of them.
- Arbitrage This is a popular algorithmic trading strategy that seeks to take advantage of correlations between financial assets.
- dollar cost average (DCA) – This is a strategy where the robot buys a bearish asset at cyclical levels.
In this article, we looked at what algorithmic trading is and how it works. We have also evaluated some of the best algorithmic trading strategies one can use in the market.
Most importantly, we evaluated the pros and cons of using a trading strategy.
Useful external sources
- How do I manage my money in algorithmic trading? – Quora