Algo Trading |
January 16, 2024Top Five Algorithmic Trading Strategies: Ace the Game of Stock Trading
Technology is developing rapidly and has impacted almost every sphere of human activities. The trading business is not left unaffected. Algorithmic trading or Algo Trading Options is a new-age trading practice that out beats the human endeavour to generate profits. It is also called:
- Automated Trading
- Black-box Trading
Algorithmic trading, as the name suggests, is a computer-generated program that follows a fixed set of instructions known as an algorithm to bid a trade. The algorithm is based on timing, quantity, and price.
Advantages of Algorithmic Trading:
- Automated trading strategies complete trades at the best stock prices.
- Renders high efficiency of trades and hence higher profits.
- Better Risk Management
- Better Money Management
- Algorithmic trading strategies make trading more systematic by evading chances of human errors.
Also, trading is High-frequency-trading (HFT) that is capable of bidding a large number of orders on multiple markets.
Top Five Algo Trading Strategies of 2024
Every trader identifies effective algo trading strategies with arbitrage opportunities to earn more profits and reduce cost-plus pricing. Below are the best five types of algorithmic trading strategies for Indian markets which you can follow:
1. Trends and Momentum Following Strategy
This is one of the most common and best algo strategy for intraday trading. Traders execute the trades simply by following the momentum and real-time trends of the Indian financial markets.
When making a decision to buy or sell stocks, traders consider factors such as price changes and moving averages. These processes automate and adhere to specific economical indicators. Comparing the price based on historical and current data makes the trading decision.
Thus, no complex process, simple and straight trend following. To simplify it, here is an example: You can set an automated algorithm to notify the system to buy the stocks if the 30-day average goes above the 120-day moving average. Likewise, the system is set to sell the stocks of the 30 days average that falls below the 120 days moving average. Simple.
2. Arbitrage Trading Strategy
Interested in trading dual-listed stocks and earning profits? Yes, then go for an arbitrage trading strategy. In this option algo trading strategy, you set an algorithm to compare prices over the different stock exchanges and execute the trade by buying at a low price from a market and selling at a high price in a different market. The arbitrary strategy does it super fast without any error. A human can never match that speed and accuracy.
For example, the share of Tata Motors is listed on both NSE and BSE. The algorithm determines the stock price difference and automatically buys at a lower price and sells at a higher price. After the execution, the trader receives arbitrage profits. This is one of the best option buying algo strategy.
3. Mean Reversion Strategy
In trading, price fluctuations are common. The mean reversion strategy works on the concept of Root Mean Square Error metric that high or low prices of a share are a temporary phenomenon and they will bounce back to their mean or average value. In the mean reversion strategy, the algorithm is set to identify and define the mean price range and execute the trade when the share breaks in and out of its defined price range.
This is a good algo trading strategy to safeguard from extreme price swings. For example: when the 30-day moving average is lower than the 120-day moving average, the simple algo indicator is set to assume that the average price will come back to the 120-day moving average, thus the algorithm is signalled to buy the shares.
4. Weighted Average Price Strategy
By far one of the best algorithmic trading strategies. It is either based on sales volume or time. Small chunks of large volume holding are released either based on historical volume profiles of the asset or set the time between start and end time.
The aim is to protect from the impact of the volatile market by closing the deal as near as possible to the volume-weighted average price or time-weighted average price. The system and algo together execute the trade successfully without any error that a manual process lacks.
5. Statistical Arbitrage Strategy
This is a short-term profitable algorithmic trading strategy that indicates price inefficiency and misquoting of similar shares. However, this price change does not last long and corrects itself. But it is difficult for humans to track these minute changes manually. Here the statistical arbitrage strategy comes in handy. The algorithm, which constitutes a complex mathematical trading strategies model, tracks changes and closes the deal before a correction occurs.
For example, if the share of Hero Motocorp goes down, the price of TVS Motor will automatically fall but will revive back soon. The algorithm takes advantage of this market inefficiency and quickly buys shares at a low price and sells them when the price is corrected. Thus, the trader earns a profit.
Conclusion
The toughest part is to choose the right algo strategy suitable to your trading needs. Needless to say, the algorithmic trading strategies are speed, accuracy, and have revolutionized the trading world, but it is the trader who will set the algorithm and make the most effective trading strategies that will best suit him.
In case you are looking for algo trading support or want to know how to create algo strategy for intraday trading, feel free to contact Findoc.