Common Types of Algorithmic Trading Strategies

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Algorithmic trading, sometimes called algo or algo trading, has become extremely popular in the internet age and now accounts for more than 60% of stock trading in the US. This method of trading is a great way to eliminate the human variable, allow numerous trades in a day, and take advantage of small market fluctuations.

But how does algo trading work? And what are some of the strategies traders can use with it? Read on for your guide to algo trading to learn how you can start using algorithms to bolster your own investments!

What is Algorithmic Trading?

This type of trading is a way for traders to set up automatic trades when a stock achieves certain parameters. These parameters are determined by an algorithm, which is particular instructions the trader puts into a computer program.

While these algorithms are often fairly complicated, they don’t necessarily have to be. A simple algorithm might have the computer buy a stock when it reaches a particular price point and sell it when it reaches another price point.

This removes the human error and emotion out of the purchases while allowing you to make the trades almost instantaneously. Sometimes algorithmic trading happens in short bursts of time, but other times it’s an easy way to set up longer-term strategies like momentum investing.

Although many large investment firms and banks perform algorithm trading, it’s also possible to get into it with just a computer, an internet connection, and some trading savvy. Some programming experience doesn’t hurt either!

What Are Some Common Strategies?

Better algorithms tend to be more complex than the simple example given above. There are a lot of different strategies that traders employ to try to make financial gains. While there’s not really a “best” strategy, some of these are more popular because they tend to provide good gains while not being overly complex.

Here’s a list of some of the basics of algo trading strategies. These are some of the more common methods, but there are plenty of other strategies people can use as well.

Trend Following

This is the most common general category of algo trading. Traders will examine trends in various categories, including moving averages, price level movements, and other technical indicators.

Trend trading is the easiest type to do, as it doesn’t require any predictions or forecasts. Comparing the 200 and 50-day moving averages is a common method of trend following.

Arbitrage

This is a method of buying dual-listed stocks in one market for a lower price, then immediately selling them in another market for a higher price. Sometimes there are price differentials between two markets, and an algorithm can take advantage of this to quickly sell in that gap.

You’ll most likely need an algorithm that can detect these discrepancies and quickly buy then sell the stocks. This is one place where a computer can absolutely perform better than a human trader!

Mathematical Models

There are a variety of mathematical models that traders use to determine when they should buy or sell stocks. This will require a lot more work on your part, but you may be able to create some useful algorithms to help your trades!

One of the most common mathematical models is the delta-neutral trading strategy. The math is fairly complicated, but it basically compares the change in price of an asset against the change in price of its derivative.

Other Strategies

There are several other algorithmic trading strategies you can employ once you get started. Practice and read up on them, and you might be surprised at how well some of them work for you!

The key is to always keep learning and researching. Find strategies that work well, and discard those that don’t.

Learn More About Investing and Finance!

Algorithmic trading is a useful tool for your investments, but it’s not the only strategy you can employ! There are lots of good methods to earn, invest, and save money to help you succeed financially.

If you’d like to learn more about finances and investments, be sure to check out the rest of our blog! We have plenty of great information and advice to help you figure out a strategy for growing your financial assets.

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About Marc Wallace

I'm never too busy to share my passion. I've created this page to help people learn more about business, finance and real estate. Besides all the serious stuff, I'm also a man that values family and healthy relationships. I hope you find my content insightful.

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