Are you curious about algorithmic trading? It’s been around since the ’80s, and there’s a good reason it’s still one of the most popular trading strategies for beginners. When you’re ready to discover the secret and learn more about this style of trading, so you can reap the benefits yourself, read on.
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What is Algorithmic Trading?
An algorithm is a set of predesigned procedures used to perform a specific task. In other words, it’s a kind of logic tree. For example, when event A happens, do task X.
Trading experts use algorithms often, so they don’t need to rely on investing tips. They define pre-programmed trading instructions and execute them when a given event occurs. The most common events revolve around price, timing, and volume.
How Does Algorithmic Trading Work?
Your goal is to identify and cash in on profitable trading opportunities, such as improved earnings or low costs. These are some examples:
Arbitrage Strategies: The goal with arbitrage is to spot dual-listed stocks which fall at a higher price in one market than another. Then, you buy the stock from one market for a lower price and simultaneously sell it for a higher price on another market. You pocket the difference (minus trading fees, of course).
Trend-Focuses Strategies: When you build your algorithms for trend variables, such as price rise or fall, or shifting averages, you avoid the need for price forecasts or other predictions. It’s one of the most straightforward strategies and therefore the most popular type of algorithmic trading for beginners.
Index Fund Strategies: This advanced strategy capitalizes on the rebalancing period which occurs in index funds. The goal is to target trades that offer 20 to 80 points profits.
Volume-Weighted Average Price (VWAP): This strategy splits up large orders into smaller pieces. You determine the best way to break them up and make a profit by searching through historical profit data that’s specific to that stock.
Time-Weighted Average Price (TWAP): It’s like VWAP, but with TWAP, you sell off the smaller pieces during a specified period. By using this method, you cut the impact that your sales have on market prices.
More strategies exist. You can learn more about algo trading from Kj Trading Systems, such as how shortfalls, POVs, and mean reversion strategies work.
Benefits of Algorithmic Trading
Look at the benefits you reap when you trade using algorithms:
- Execute trades at the best price
- Evaluate strategy with current or historical data to ensure the viability
- Place trades instantly and accurately
- Costs less per transaction
- Check numerous market conditions with ease
- Avoid substantial price increases and drops
- Limit the risk of user error
Reducing the risk of human error is arguably the most important reason to use algorithms. Once you set up your system, you need only make minor tweaks to the system. Otherwise, it runs by itself.
Now that you see the benefits of algorithmic trading, it’s time to add algorithms into your daily trade practice. Begin by choosing your favorite strategy from your list above. Then use it to trade paper for at least three weeks and see the benefits for yourself.
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