An Explicit Guide to Algorithmic Trading | Algorithmic Trading Strategies

Lakshya Singh

Aug 2, 2020 — 4 min read

Algorithmic trading( algo-trading) also known as automated trading or black-box trading refers to the automated placing of trades using computer programs that follow algorithms. These algorithms are a set of digital program that independently executes a trade. The trade, in theory, can generate profits at a speed and frequency that is impossible for a human trader. Here is the guide to algorithmic trading strategies to help you become successful at algo trading.

This type of algo trading involves following market trends and making trading moves based on them. It needs quality monitoring and diversification for you to make the most of it. Momentum strategies which look to make profits from existing market trends are based on investors' biases and emotions. With more overwhelming advancements in automated trading, algorithmic trading is outperforming human traders.

Here are some of the algorithmic trading strategies and modeling ideas that are prevalent used in today’s market:

Modeling Designs for Momentum-based Strategies

It is essential to think how to create a trading algorithm model. It is worth noting that modeling in this strategy is built around the under-reaction to different pieces of information leading to either short-term or long-term profits. Earnings momentum strategies cater to the former, while price momentum strategies cater to the latter.

A good algorithmic trading software also plays a key role in algorithmic trading. Price inefficiencies in event-driven investments can be very advantageous to the marketing element. This is because automated machines can be used to instantly track these inefficiencies before they are adjusted. That is where a statistical arbitrage strategy comes in handy.

Statistical arbitrage is based on mean reversion hypothesis and is designed to generate profit by spreading risks among a large number of trades and expecting profits from them over a short period. Pairs trading refer to trading wherein stocks that have been known to move together (price-wise) are paired using market-based similarities. In the event of stocks outperforming each other, the pair is balanced by selling one short while the other is bought long, thus maintaining equilibrium.

Delving Deeper into Market Making

Market making provides liquidity to securities that are not always traded on the stock exchange. Thus, the trading algorithms have a propensity for maximizing profits from the bid-ask spread. So pertaining to illiquid securities, the spreads are usually higher, and so are the profits. However, this strategy is only profitable when the model precisely predicts future price deviations.

Market making models work on any of these models two stratagem. The first model of market making focuses on inventory risk since it is based on the preferred inventory position and prices that are determined by risk appetites. The second model of market making relies on distinguishing between informed and noise trades.

Machine Learning In Trading

With trading models built on machine learning, algorithmic trading with python can predict the range for short-term price movements. The best part is that these AI-powered models are built to handle large amounts of data at high speeds while improving the model over time.

Market trends can be predicted using a couple of machines synchronized into what is known as a "Bayesian network". This deploys AI that can run across a large number of machines. It does this by creating and testing a large yet random group of digital stock traders to decipher fresh and hidden opportunities.

Algo trading is one of those things in life you can't just do yourself because of its nature. It is true you need professionals to do their thing masterfully. Kjtrading Systems will make your trading experience a profitable and remarkable one if you let their experts in.