Algorithmic trading strategies are not a new concept, but they have become more popular in recent years. Many traders are using algorithmic trading to make their trades instead of making them manually.
But what are algorithmic trading strategies, and how do they work?
This article will explain the basics of algorithmic trading and will introduce you to some strategies so that you will know a little bit more about it to decide whether to use it or not.
So, let’s begin now.
Basics of algorithmic trading
Algorithmic trading is a method of using algorithms to trade on financial markets. The computer programs follow specific instructions that can generate profits at speeds and frequencies impossible for humans, making it faster than traditional methods like futures contracts or options trades where people have limited time in which they must make decisions about what investments will bring them returns.
Algorithmic traders use high-frequency trading technology to make tens of thousands of trades per second. This can be useful for situations like order execution, arbitrage, and trend following strategies where you need fast reactions from your investments.
It allows quite a lot of benefits among which are:
- carrying out deals at the best possible prices
- transaction costs are reduced
- manual errors while placing trades are reduced
- the instant placing of a trade order
Algorithmic trading strategies
Below you will find some common strategies used in algorithmic trading;
One of the most popular and easiest strategies to implement through algorithmic trading is a trend following. This strategy involves buying assets when they are rising (or falling) based on trends that may be developing in those markets, with shorter-term moving averages like the 50-day being used for short-term trades while 200 days provide more long-term stability.
But it also includes predictions about future price movements which can make it harder than just taking an entry point at any given moment without worrying too much about what has already happened beforehand.
Strategies based on a mathematical model
One of the examples is a delta-neutral trading strategy. It is a proven mathematical model that can be used to trade on different assets.
This strategy means you would have an advantage in situations where there are gaps or shortages because the market will not move against your position as much, giving it more room for growth than if were traded alone without any other instruments involved with them being combined into one portfolio.
Main reversion strategy
The mean reversion strategy is based on the concept that prices for an asset will return to their average value, and this can be identified by analyzing fluctuations in the price history.
The automatic trading option allows you to trade anytime there is a breakout or drop below the range set forth before it – so long as your algorithm has been programmed with expectancy rules determining when these events might occur.
The article introduced you to some basics you should know before starting algorithmic trading and a few strategies you can take into account.
Experiment with different strategies and find ones that work best for you so that you will get to success faster. In addition, before getting started you always can discuss the choice of a strategy with a broker you work with.
The beginners from Nigeria can check out cmtrading review while choosing safe brokers.