- What is an algorithmic trading strategy?
- How do program trading strategies work?
- Why use algo trading?
- Types of algorithmic trading strategies
- HFT algorithmic strategies
- Algo strategies for crypto
- Black-box strategy
- The best books on algorithmic trading for beginners
- Other tutorials with profitable algorithmic trading strategies
- Top algo trading platforms and software
Stock, cryptocurrency (Bitcoin, Ethereum, etc.), Forex, and binary options trading are popular ways to grow traders’ capital, even for beginners. But whatever way traders choose to get additional income, strategies do not always help them succeed in trading. One of the most popular is an algorithmic trading strategy where traders use auto trading software to help them make wise trading decisions or automatically execute trades without looking at their dashboards.
What is an algorithmic trading strategy?
An algorithmic trading strategy is also called an algo or black-box trading strategy. It is used by traders to make trading easier. An algo strategyisbased on programmed algorithms and allows users to see the best price for a financial instrument to quickly buy it from one broker and sell it from another. It turns out that with an automatic trading strategy, traders can make profits at a speed and frequency that are impossible if they trade manually.
Also, algorithmic trading has significantly changed the Forex market, improving the functioning of currency trading. It can give traders a speed and accuracy advantage when buying and selling through currency pairs (e.g. USD/INR) in the foreign exchange market. However, such automated Forex trading carries certain risks: an imbalance in the trading opportunities of market participants, high volatility and a sharp decrease in market liquidity.
How do program trading strategies work?
With the advent of electronic trading, program trading strategies have become an essential part of investing for most users. Program trading refers to the use of computer-generated algorithms to increase the profitability of trading in the market.
Due to the robustness of algorithmic trading strategies, many traders use various types of software to automate their trading activities. One of the best algo trading programs is AmiBroker, which is used for technical analysis. AmiBroker’s powerful auto-trading interface allows traders to trade directly from the charts. Another popular software for algorithmic trading is Algosim. This application allows traders to perform advanced math analysis, physical simulation and visualization.
Note! Algorithmic trading programs automate the process and allow you to trade smart online. Such automated trading software is used on a computer; it follows a specific set of instructions to place a trade.
Why use algo trading?
The use of algo trading provides users with several benefits. These include the following:
- Instant and rapid trading, avoiding significant price changes.
- Accurate order placement of trades.
- Trade at the best possible prices.
- Reduce errors that are usually made in manual trading.
- Low transaction costs.
Investors can trade in large volumes and at high speeds across multiple markets simultaneously. It is called High-Frequency Trading or HFT.
Algortrading strategies are used by many traders, including:
- Buy-side firms, such as hedge funds, pension funds, and investment managers.
- Insurance companies.
- Mid- to long-term investors.
- Short-term traders.
- Sell-side participants, such as arbitrageurs, speculators, and brokerage companies.
- Systematic traders.
Overall, the algorithimic trading strategy gives them a more systematic way to participate actively in trading. It provides more efficient trading than just using intuition.
Types of algorithmic trading strategies
There are different types of algorithmic trading strategies. They are suitable for everyone, whether they are beginners or professional traders. If you are asking which ones are the best and on which indicators, below is a list of the Top 10 algo trading strategies:
- Sentiment analysis strategy. This simpleautomated trading strategy is programmed based on people’s emotions, reactions, and feelings surrounding certain types of assets. This approach uses tools that automatically analyse customer feedback, allowing investors to earn profit by capturing short-term price changes. It is designed for day trading.
- ETF rotation strategy. It uses a rule-based approach that combines the key elements of trading and investing. In this strategy, traders profit by periodically rotating money from ETFs where momentum has slowed into ETFs showing strong momentum.
- Smart beta strategy. It is built around reducing trading costs and increasing diversification. With this approach, traders can capture market inefficiencies. This type of algo strategy is often used for portfolio risk management and diversification.
- Momentum investing strategy. With this approach, investors buy assets experiencing an uptrend and then sell them when they seem to have peaked.
- Trend following strategy. It is an old algorithmic trading system that uses indicators, market patterns, and technical analysis to allow investors to earn profits.
- Quickfinger Luc trading strategy. Automated software programmed to use this strategy allows investors to purchase assets in their panic mode without losing.
- Hull moving average (HMA). It is one of several moving averages used by traders to identify trends. HMA provides information of higher quality to those whose trading strategy depends on the slim margins within the price movements of an instrument. It is smooth and does not lag.
- Fourier Transform. It is a trading strategy usually used for forecasting trends and market directions. Fourier analysis transforms a signal from the domain of the given data, usually time or space, and transforms it into a representation of frequency.
- Pair trading strategy. It relies on the use of technical and statistical analysis to earn profits.
- Quantitative trading strategy. It uses price and volume inputs to come up with trading decisions. You can see this in High-Frequency Trading (HFT). Quantitative trading strategies are commonly used for Forex trading.
- Mathematical model-based strategies allow trading on a combination of options and the underlying security.
Algo strategies are used widely by investment banks, mutual, pension and hedge funds that may need to spread out the execution of larger order. For example, such firms as Goldman Sachs, Algorithmic Trading Strategies Pty. Ltd., AMP GLobal Clearing and many others use marketing and algo strategies in their trading activities. Also, almost all of the listed algorithmic trading strategies are perfect for Forex trading.
But one of the well-known disadvantages of algorithmic trading is the trader’s dependence on technology. Algorithms and roboots are programmed by people who can make mistakes when coding. It can lead to significant capital losses.
So, these strategies used in algorithmic trading have their pros and cons. Investors who are not yet too familiar with the use of algorithms in their investment ventures can try each of these and see which one works for them.
HFT algorithmic strategies
High-Frequency Trading is one of the best algorithmic trading strategies that allow investors to trade using two-way order placement. They aim to buy an asset at a low price and sell it at a high price (for example, cryptocurrency in the form of Bitcoins) to benefit from bid-ask spreads. HFT algorithms also send multiple small-sized orders to analyze patterns and the time taken to execute a trade to “sense” any large pending orders. If they get an opportunity, then try to capitalize on large pending orders by adjusting prices to fill them and make a profit.
Algo strategies for crypto
The rise of the popularity of cryptocurrency paved the way for more mathematical and software geniuses to create algorithms designed specifically for crypto trading. One is the SHA-256, the first mining algorithm developed for those mining bitcoins. Today, several auto-trading strategies for data mining are now being used widely by various traders. These include standard mean reversion, mean reversion, and trend follower trading strategies, arbitrage.
The black-box strategy is used by investors who want to employ a fully-automated approach to engaging in the financial market. Applications used in this strategy are called “quant”, algorithmic, or automated systems. The black-box strategy is essential in many trading areas, particularly High-Frequency Trading. The programming codes for the black-box approach are based on specific trading rules and guidelines that are often shrouded in secrecy.
The best books on algorithmic trading for beginners
One book worth checking out is “Quantitative Trading: How to Build Your Own Algorithmic Trading Business” authored by Dr. Ernest Chan (it can be bought online in PDF format). This book provides information on effective algorithmic trading methods, how to use them and get the most out of quantitative investments. Ernie Chan also has a book, “Algorithmic Trading: Winning Strategies and Their Rationale”, which can be downloaded from www.pdfdrive.to.
Other authors also give excellent insight into trading and using algorithmic strategies. Here are some of these books:
- An Introduction to Algorithmic Trading: Basic to Advanced Strategies by Edward Leshik.
- Algorithmic Trading and Quantitative Strategies by Raju Velu.
- A Step-by-step Guide to Quantitative Strategies – Successful Algorithmic Trading by Michael L. Halls-Moore.
- A Guide to Creating a Successful Algorithmic Trading Strategy by Perry J. Kaufman.
- Strategies, Tips & Tricks for Algo Trading by Dilip Kumar, Nishant Bhatia.
Some of these books can be downloaded free from GitHub or other sources in PDF format. On paid platforms like Amazon, you can see their samples (a few pages for reference).
These books provide information on the basics of algorithmic trading and may help you understand the different charting techniques used in intraday trading, such as the Ichimoku cloud. They may also provide a deeper insight into some of the most mind-boggling techniques, such as the Heikin-Ashi, Bank Nifty Option, Volume Weighted Average Price (VWAP), OHL scanner, and other intraday trading strategies.
You can also read algorithmic trading news on Reuters or learn about strategy building on A Digital Blogger blog in Hindi and English.. And don’t forget about Investopedia, where you can find fascinating articles explaining what algorithmic trading is or steps to create a binary options robot algorithm.
Other tutorials with profitable algorithmic trading strategies
If you are planning to get a more in-depth insight into the best-automated trading strategies, there are video tutorials onYouTube. For example, about the Mad Hatters Bitcoins trading strategy. There are also online algorithmic trading courses for those who want to learnhow to code and develop their algo trading systems.
In addition to books and video tutorials on YouTube, you can learn how to code your algorithmic strategies with online courses on Udemy. For example, the Algorithmic Trading with Machine Learning in Pythoncourse by James Briggs, a data scientist for various banks in London. You find out how to apply the cutting-edge in NLP to the world of algorithmic trading using Python. You can also find courses like Algorithmic Futures Trading, where you will learn how and where to choose a trading strategy and build an investment portfolio.
The training institute from QuantInsti Quantitative Learning Pvt Ltd is popular in the Indian trading community. Here you can take courses on trading, such as:
- Options Trading Strategies In Python: Advanced;
- Automated Trading Using Python & Interactive Brokers;
- Python for Algorithmic Trading: Basic;
- Quantitative Approach in Futures & Options Trading; etc.
So, programming skills are a necessary factor for creating an automated strategy for algorithmic trading. Building your own algorithmic strategy gives you complete flexibility in customizing it to suit your needs. All this can be learned online.
Top algo trading platforms and software
No need to wander in the dark looking for a platform for your trading activities. Just check out the list below:
- Algobridge is the web-based algorithmic trading platform for the stock and commodity market. It is perfect for those who do not want to download any program into their computers. Algo-bridge is for those who are into stock and commodity investing. It is already loaded with powerful trading strategies, but investors can still use their methods when trading if they prefer.
- SAS Online is India’s Deep Discount Brokerage company with over 50K customers. It also provides the Alpha trading platform with a unique feature for users to create their own trading systems via API (Application Programming Interfaces).
- QuantConnect is an icon in the world of cloud algorithmic trading platforms. It provides a free financial data and algorithm backtesting tool to develop algorithmic trading strategies.
- MetaTrader 4 provides the broadest range of opportunities for Forex trading. It includes a prebuilt signal database and provides an Expert Advisor for algorithmic trading. All functions can be customized to suit your needs.
- Moneycontrol provides real-time financial market updates for millions of investors and traders. Users can customise it according to their needs and preferences: watch the market in real-time; create your portfolio to track your investments in stocks, mutual funds, gold and other assets; read and chat on the forum about algorithmic or indices trading, the best strategy in retail, trading bots, etc.
- Omnesys Nest was created by Omnesys Technologies Pvt. Ltd. It is one of the best online platforms that offer a variety of trading tools customized for different types of users (retail brokers, institutional brokers, proprietary desks, and exchange companies). BSE, NSE, MCX, NCDEX exchanges are available to users of this platform.
- Streak by Zerodha is a highest rated algo trading platform in India. It does not require coding skills as it uses modern algorithmsto create, back-test and deploy trading strategies.
If you are more hands-on, you may create your automated software. Algo systems can be created using Python or MatLab with examples. You may even make your fully automated trading platform if you have advanced knowledge in coding (or use Kite Connect) and host it on MyTradeHost VPS, a popular hosting.
If you are a developer and are wondering can I sell my algo trading strategy, then the answer is Yes. You can sell it on some algo strategy marketplace like TradeTron.
Algorithmic trading integrates technology and financial markets, where investors and traders use computing power for high-frequency trading. They can also set when they want to open or clouse trades. And thanks to a variety of strategies, algorithmic trading is prevalent today.
Having understood what algorithmic strategies are, you can choose the one that suits your trading. It is the ability to use trading methods and strategies that work, including algorithmic ones, that help to achieve success in trading.
Remember that algo strategiesfor futures&options trading or other trading activities are not guaranteed to lead to success. System failure can result in missing/duplicate orders, so constantly monitoring these automated trading systems is essential. That is why traders must learn and practice before using algorithmic trading programs.