| May 16
Algorithm trading strategies - Findoc
What is Algorithm Trading?
It is a type of training that uses a computer program that follows a specific type of algorithm to buy and sell stocks, futures, options, cryptocurrency. An algorithm basically means a piece of code that follows a step-by-step set of operations. Algorithm trading is also known as algo-trading, automated trading, black-box trading. To perform algo-trading, various algo trading strategies are used.
Let us now understand the meaning of algo trading strategies and their types.
Algorithm Trading Strategies
Algo trading strategies are used to rectify the most commonly made mistake i.e. Human error in trading activities. Human error includes human emotion of fear and greed, which is the biggest drawback for human traders. So, to overcome this error we have algo trading strategies. There are many algo trading strategies but here are the best 5 algorithm strategies that are most commonly used.
5 Best Algo Trading Strategies
Momentum - Underlying trend strength. This is the simplest and most widely used algo trading strategy, this strategy is used by those who want to take advantage of strong price trends. Momentum strategy follows when there is a spike in volatility. Volatility refers to rapid changes in the prices. Traders take advantage of a highly volatile market seeing short term rises and falls.
Mean Reversion Strategy
Mean reversion is an effect where market price is traded back to the historical average price.It is believed that asset’s high or low prices are temporary and they will return to its average price over a period of time. Algorithm traders use historical price data that determines the average price of the asset. They then open buy or sell in anticipation of the current price coming back to the average price.
It is a short term algo trading strategy
. It arises when there is inefficiency in the prices. Statistical arbitrage involves complex quantitative models and big computation power. The most popular form of statistical arbitrage is pair trading strategy, in which the assets that are related to each other are there.
Machine learning based algo-trading strategy
A new form of algorithm trading uses machine learning and AI.Through machine learning and AI , the trading robot is updated with what is working and what is not working. It is an innovative area that will be out of reach for most of the retail traders at such an early stage of its development.
Index rebalancing strategy
Algo trading in India invests heavily in index funds through pension and retirement accounts which need to be rebalanced periodically to adjust new underlying prices.Re-balancing creates unique opportunities for algo traders who exploit the expected trades that take place before rebalancing of funds. Most retail trading platforms won’t support this type of trading strategy. The hedge-funds that deal with high frequency trades usually use such strategies.
in India started from the year 2008 by SEBI and at that time it was available to only institutional investors.Retail traders have started using this strategy from the last 5-6 years. India provides a good opportunity to traders to conduct algo-trading in India.