Basics of Algorithmic Trading: Concepts and Examples

Basics of Algorithmic Trading

Algorithms are instructions that have been well defined to help with the management of nay process or task. They can be applied to a range of situations, including those that follow patterns to make it easier to make informed decisions. Then there is algorithmic trading, which is also known as black box trading and automated trading. This is where a trader will set or programme their computer to follow predetermined instructions. These instructions will guide to ensure that it makes a significant amount of profit, more frequently than would be possible with a human doing normal traders.

Algorithms are set by analyzing the best time for trading, acceptable prices and also the right amounts that should be traded. This will help a trader increase their chances of making a profit, and also creates a system for trading. Calculated decisions are often more profitable as they are based on facts, rather than on the emotional responses of human beings.

Situational Example

A trader is looking for some simple indicators to follow when making a trade. For this, he chooses that he wants to purchase 100 shares, basing this decision on the time that the stock has a 30 day moving average increase over a 60 day moving average. Then, the decision to sell the shares are based on the time that the 30 day moving average has gone down lower than the 60 day moving average.

There is quite some information that one needs to gather to make a decision. A computer algorithm will be able to extensively evaluate the changes in stock prices, also considering the moving average factors. When the set criteria have been met, it will be easier to play buy stocks that are bound for higher levels of success. It is an efficient process

Strategies

To bring Algorithmic trading to life, there are various strategies that need to be considered. These make it easier to elevate earnings as well as to bring down costs. There are three types of strategies that you should consider. The most common ones are the trend following strategies which make it possible for you to follow different trends in price level movements, channel breakouts and moving averages.

The next option is the arbitrage opportunities which involves looking for a stock that is in two markets at the same time. You can buy a dual listed stock at a lower price in a market, and at the same time selling the stock at a higher price in the next market. This means that you can make a profit without any risk.

The third type of strategy is the time weighted average price also known as TWAP. This is a strategy that begins with a large order, which is then released into smaller proportions into the market. By consistently releasing these orders, it becomes more possible to get an order that is close to the average price, in between the starting and ending times of the trade. This means that there is less impact on the market and one can get a good trade.

Algorithmic trading is meant to make the entire trading process easier. However, it is essential that one ensure the concept or strategy that they use has been thoroughly tested. Before choosing to go with algorithms, it will pay to get some experience in programming so that one can fully understand the way that they work. As you start with one strategy, stick with it and see it through to the end rather than being tempted to switch in between strategies. This will make it easier to gain a profit.