| February 19
5 Algorithmic Trading strategies: Ace the game of 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 is a new-age trading practice that out beats the human endeavor to generate profits. It is also called as :
- 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 Algo trading:
- Trades are completed at the best prices.
- Renders high efficiency of trades and hence higher profits .
- Better Risk Management
- Better Money Management
- Algo 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.
Best Algorithmic trading strategies:
Every Algo trading strategy is identified with an opportunity to earn more profits and reduce costs.
- Trends and momentum following strategy:This is the most simple and opted Algo trading strategy. The trades are executed simply following the momentum and trends of the market. Certain technical indicators like moving averages and price level movements are taken into consideration to buy or sell. These are auto-generated processes that execute based on set technical indicators. The decision is made by comparing the historical and current prices. Thus, no complex process, simple and straight trend following. To make it simple for you here is an example: You can set an algorithm in a way that the system is notified to buy the shares if the 30-day average goes above the 120-day moving average. Likewise, the system is set to sell the shares of the 30 days average that falls below the 120 days moving average. Simple, right.
- Arbitrage trading strategy: Interested in trading dual-listed stocks and earning profits? Yes, then go for an arbitrage algorithmic trading strategy. In this algorithmic trading, 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 is listed on both NSE AND BSE. The algorithm finds out the price difference and automatically buys at a lower price and sells at a higher price. After the execution, the trader receives arbitrage profits.
- Mean Reversion strategy: In trading, price fluctuations are common. The mean reversion strategy works on the concept 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 algo 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.
- Weighted average price strategy: By far one of the best algo trading strategies. It is either based on 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.
- Statistical arbitrage strategy: This is a short-term 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 constituting a complex mathematical model tracks the changes and closes the deal before the correction happens.
For example, if the share of Hero goes down, the price of TVS 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.
To wrap up: The toughest part is to choose the right strategy suitable to your trading needs. Needless to say, the algorithm trading strategies are speed, accuracy, and have revolutionized the trading world, but it is the trader who will set the algorithm and strategies that will best suit him.
In case you are looking for algo trading support, we can help you.