- 1 What Is Algo Trading: A Basic Idea Of Algo Trading For Beginners?
- 2 How Does It Work: Detailed Operation of Algorithmic Trading
- 3 Forex Algo Trading Strategies: What are Types of Algorithmic Trading Systems
When we talk about trading, the first thing that comes to mind is the so-called traders. Each one prepares to the fullest and sets as their goal resounding success in their daily operations. Algo trading is not generally thought of.
Currently, only 25% of US operations related to the stock market are carried out manually, that is, by people. The rest, the vast majority, results from the work of a new system known as algorithmic trading.
Now, what is Algo trading? Is Algo trading a replacement for regular trading? How does it work, and what are its variants? What aspect should anyone who wishes to enter this world? All this and more, we will tell you below.
What Is Algo Trading: A Basic Idea Of Algo Trading For Beginners?
Algorithmic Trading or Algo Trading may not sound familiar to you. But if I’m talking about High-Frequency Trading or Trading Robots, EAs (Expert Advisors), etc., I’m sure they are familiar to you.
Everything is the same; everything is Algo trading. Algo trading is a new form of automated trading that is done using a series of complex mathematical formulas. For this, it is necessary to have as tools specialized high-tech computers.
With Algorithmic Trading, it is possible to solve complex problems such as the division of some transactions that a company carries out. Thus, the market is not affected abruptly, and finances do not take risks.
But there is more: this system also allows the development of strategies to know the moment, the form, and the type of operation that a company must carry out. All in a matter of seconds.
One of the prerogatives of using this type of trading is to use it in a highly liquid market and on classic products, such as stocks, currencies, or fixed income products.
How Does It Work: Detailed Operation of Algorithmic Trading
There are two types of activity in Algo Trading: assisted trading and automated trading.
The former is, in a way, the basic version of this method. The mathematical models are used to provide trading suggestions. Investors may or may not use these suggestions freely when placing their orders.
Automated trading is more exceptional and complex. It transacts directly 24 hours a day and according to established strategies.
So, who is algorithmic trading for, and what do you need to use it for?
It goes without saying that algorithmic trading is not intended for beginners. In fact, programmers can access the trading algorithms that define their work instructions to follow a precise and thoughtful investment strategy. However, they are designed to run on different operating systems.
Of course, the transactions carried out by these instruments are encrypted. In this way, the machines launch calculations at very high power because they simultaneously contrast different sources. They take the history of the market, volatility, and other elements of this type into account.
Forex Algo Trading Strategies: What are Types of Algorithmic Trading Systems
Algorithmic Trading systems can be programmed to open and close positions, responding to different market situations.
Some ideas to create algorithmic trading systems could be:
1. Indicator-based strategies
These are the most common and the ones used by traders who start in algorithmic trading.
These strategies use technical indicators to identify changes in price action, trends, or other price behavior.
An example would be a price movement, accompanied by increased volatility or volume.
Typical indicators for this type of strategy are the RSI or Bollinger Bands.
The professionals of the automated systems of trading usually create their indicators. They filter the signals that they want to capture.
2. Correlation-based strategies
These strategies include what is known as statistical arbitrage. It is about taking advantage of price movements between assets that are correlated.
When the system discovers that the price deviates from its usual parameters, it will open a long or short position. However, it depends on whether the correlation is positive or negative.
Some correlations are evident to us and that we do not usually take advantage of. For example, the movement of the GBP/USD and the FTSE 100 index.
There is also a specific correlation between the DAX 30 and the EUR/USD.
This correlation is explained by the number of exporting companies within these indices. And the movement of currencies affects their export capacity.
Advantages of Algo Trading
In certain markets such as Forex, algorithmic trading is gaining more and more ground.
The Forex is a market open 24 hours a day, which generates multiple opportunities to make money. You can put your system on autopilot and go to sleep.
Everything is not as simple as it may seem at first glance, but the directions are there.
· Diversification and optimization of risk
It also allows optimizing a Trading account, operating in different markets that are not correlated.
Obviously, it is not an easy task for a trader. But a computer program will have no problem in tracking different markets and detecting opportunities.
· Performance can be easily assessed
One of the advantages of algorithmic trading is that we can evaluate a system in the past.
This situation gives us a relatively accurate result of the risk we are taking with a given system. And therefore, we can add or withdraw capital, let it work at certain times, etc. With a manual system, this situation is always difficult to assess.
Disadvantages of Algo Trading
One of the great handicaps of Trading with Robots or programmed strategies is precisely programming.
It is not easy to carry out this type of program.
If we do not program ourselves but buy a programmed system, we face some problems. We do not know precisely how it works and how it makes the purchase or sale decisions. This is what Alexander Elder calls a “black box.”
Another disadvantage when we buy a Trading Robot is that it can be a fraud. Of these, there are hundreds on the net.
In conclusion, Algo trading is not for everyone and less for retail investors who carry out occasional operations in the markets. One of the best ways to approach the market for a starting trader is by creating a system that faithfully follows some rules. But if you still have doubts about what is Algo Trading, we suggest you do some more research before stepping into the new horizon.