What You Should Know to Win at Algorithmic Trading

Among all the trading techniques, one of the most popular and sophisticated is algorithmic trading.

Algorithmic trading uses automated computer programs following a defined set of instructions. In theory, algorithmic traders can generate profits with speed and frequency undoable by human traders.

Algorithmic trading makes up a significant share of trading activity for various asset classes worldwide. According to Mordor Intelligence, it accounts for around 60-73% of equities trading in the US markets, the largest in the world. In the global commodities market, it’s about 35-50%.

Here’s a simple example of an algorithmic trade. Write a computer program that:

• Buys 100 shares of a stock when its 30-day moving average falls below the 60-day moving average;

• Sells 100 shares when its 30-day moving average goes above the 60-day.

  
  

There are more complex algorithmic trading forms, but this is a good introductory example.

Requirements of Algorithmic Trading

Algorithmic trading may sound enticing, but it’s not something you just jump into without paying attention to certain crucial factors. There are stringent requirements if you want to be a successful algorithmic trader. They include:

1. Computer Programming Knowledge

Algorithmic trading involves executing trades based on pre-programmed instructions. Hence, you ought to have sufficient computer programming knowledge and expertise to be a fitting algorithmic trader.

It’s one thing to develop a conceptual automated trading strategy and another to implement it. A good understanding of the financial markets will help you conceptualize, but you need programming skills to convert the conceptual plans into instructions for a computer.

You could pick up different languages for algorithmic trading, e.g., Java, Python, and C++. Don't give up if you think you aren’t cut out for it. You can always hire programmers to help you. There are also various marketplaces where you can buy ready-made trading strategies designed and coded by other programmers like MQL5.community Market.

2. Trading Platform

The algorithmic trading platform you select can make or break your trading career.  Hence, choose one with the features that best suit you. Avoid trading platforms known for frequent downtimes or lax security practices. Also, find the one with the best possible fees.

It won’t be easy to switch to another trading platform if you’re not satisfied, so you need to choose wisely the first time. An example of a common algorithmic trading platform is MetaTrader 5.

3. Network Connectivity

You should pay attention to latency, the amount of time a signal takes to travel from its sender to the intended recipient. In algorithmic trading, a few seconds or milliseconds can determine your profits. Ensure to spend the proper amount on computer hardware, software, and data lines that deliver the best latency and speed. It may be expensive but is worth it in the long run.

Remember, you are competing in real-time with other algorithmic traders around the globe, so you need maximum speed.

4. Testing Infrastructure

You don’t just deploy automated trading programs on the live markets without first testing. Testing gives you a good idea of how your trading algorithms will perform in the real world. Hence, you should choose a trading platform with adequate testing infrastructure.

There are two main types of testing for algorithmic trades; back-testing and forward-testing. Back-testing tests your algorithms on historical market data, while forward testing tests on real-time data. Many trading platforms offer extensive back-testing and forward-testing features like Trading Strategy Tester.

Benefits of Algorithmic Trading

There are many advantages of algorithmic trading over regular human trading. The foremost benefit is in speed. Algorithms can take advantage of trading opportunities with speed impossible for humans. Other benefits include:

• Execute trades at the best possible prices thanks to pre-programmed instructions.

• Lower transaction costs.

• Back-testing and forward-testing improve accuracy.

• Lessens the possibility of manual trading errors.

• It minimizes the possibility of mistakes from sentimental factors.

  
  

If you decide to pick up algorithmic trading, you’ll be in good hands. The sector is huge yet growing rapidly. According to Markets and Markets, the global algorithmic trading market is expected to grow to $19 billion by 2024, compared to $11 billion in 2019. Why not ride this growth wave to higher trading heights?