Did you know that the global algorithmic trading market is expected to grow by 10% in the forecast period of 2021-2026?
You might have heard about it as algo trading, black-box trading, or automated trading. They all refer to the same investment methodology. By using computer programs and specialized software, investors can program their platforms to trade for them. There’s minimal human intervention necessary.
If you’re interested in learning more about algo trading, you’ve come to the right place. Keep on reading for our full breakdown of all things algo trading. We’ll focus on the benefits, as well as the most common trading strategies.
Algo Trading Benefits 101
Before delving into the nuances of algo trading strategies, let’s explore their main benefits. After all, what’s the use of cramming and studying investment strategies without knowing the perks in advance?
Here are the best investment strategies that nail down trades you can execute in seconds instead of minutes.
Avoiding the Bulk of Human Error
One of the most significant benefits of algorithmic trading is eliminating human emotions from trading operations. Trading operations follow a particular set of instructions, which explains why.
Unlike algo trading, human trading is susceptible to emotions, which may lead to illogical trading choices. Algo-trading is mostly focused on computerized. Or, automated trading that does not include human intervention.
As a result, algo-trading continually advises traders not to take on more risk than they can manage. This is perfect for preventing negative emotions from taking over.
Higher Rates of Trading Accuracy
The precision and timeliness required for algorithmic trading success are critical. Normally, if people were engaged in algo-trading, there would be a lot of opportunities for mistakes.
On the other hand, Algo-trading relies on a computer to execute transactions based on a set of instructions. It’s a simple way to minimize the risk of mistakes. As a result, preparation is recommended to make the best trading choices possible. This will lead to enhanced transaction accuracy.
Increased Speed for Trade Placement
An algorithmic trade allows dealers to make several transactions at once while retaining speed and accuracy.
Making numerous transactions improves your chances of making more money. The speed of transactions has risen dramatically as a result of increasing innovation and the use of technology.
Back Testing Capabilities
Traders must identify which elements of their trading system have flaws. And devise ways to fix them as soon as feasible to prevent incurring needless losses.
Traders may back-test their trades using historical data and compare them to current data using algo-trading. This is a suggested method for determining if transactions would have resulted in the same outcome.
Lower Transaction Costs
Algo-trading has integrated technology into trading operations, lowering transaction costs significantly. Traders don’t have to be glued to their screens all of the time to keep track of their trades.
You may carry out trades without continuous supervision. A set of instructions is used to program the system, which monitors trade activity. It helps save money and time that you would otherwise spend monitoring trading operations.
Using High-Frequency Trading
High-Frequency Trading (HFT) is an algo-trading technique that uses high-utility and powerful computers to execute transactions according to a set of instructions.
Through the use of sophisticated algorithms, these transactions are carried out at breakneck speeds. Traders who utilize high-frequency trading systems have a greater turnover rate than those who do not. Algo-trading has high trade ratios despite large turnovers.
Bigger Market Volume
Traders now have the unique chance to diversify their trading platforms thanks to algo-trading. Traders, both individuals, and businesses can effectively and quickly trade huge volumes of shares.
This implies that market traders may purchase many shares, sell them very quickly, and make a large profit.
Key Strategies in Algorithmic Trading
Now that you have a thorough understanding of all the perks you’ll receive. It’s time to learn what those strategies look like.
The main rule of thumb is that every single strategy should have an identified opportunity. This applies in terms of profitability or reduction of risk or cost. Otherwise, it wouldn’t be a useful strategy to implement.
Yet, you might want to check out what the professionals like KJ Trading Systems are doing. Learning the theories is one thing, but implementation is quite a different animal.
The Trend Following Strategy
Let’s begin with the most popular and common of all strategies, which is following the trend.
Moving averages, breakouts, price level change, and other patterns are utilized. This is the simplest approach to adopt since it does not require any price forecasting.
Trades are carried out based on a well-known trend that is simple to apply. For example, the most often used moving averages are the 30-day, 50-day, and 200-day moving averages.
The Index Fund Rebalancing Strategy
The rebalancing period for strategy index funds is set.
This keeps the holdings in line with the indexes they’re compared to. For algorithmic traders, this approach provides an opportunity.
Traders are more likely to benefit from anticipated trades that profit 25-75 basis points. Based on the number of stocks in the index before rebalancing.
Model-Based Strategy: The Mathematical Strategy
Trading on a mix of options and underlying security is possible with certain models, such as delta-neutral.
The ratio that compares the change in the asset’s price to its equivalent derivative is known as delta. Delta neutral, for the uninitiated, is a portfolio strategy. It consists of holdings that balance the positive and negative delta.
The Mean Reversion
The approach is based on the idea of a transient high and low price for an asset that reverts to the mean value over time.
The key component of this approach is identifying and defining the price range and then putting the algorithm into action.
Cracking the Investing for Beginners Code
While algorithmic trading might be a bit intimidating in beginners’ eyes, we can assure you that it’s not rocket science.
We hope that our explainer has shed some light on the main benefits and strategies of algo trading. This way, you can immerse yourself in the field with a solid foundation.
And, if you enjoyed our article, you’ll want to check out our trading tips and investment strategies. You’ll find all the essential blogs (and more) in our finance section.