Looking to learn more about algorithmic trading? You’ve found the right article. We’ll give you the down-low on this style of trading, and help you determine if it’s the right method for you. Mind you, we’ll only be offering a brief introduction, so you’ll have to make the final decision on whether algorithmic trading strategies are going to be a good strategy for you. Certainly, they can be very powerful, but they can also be a bit tricky to design and implement (at least successfully).
So What is Algorithmic Trading?
Basically, algorithmic trading refers to the use of automated trading computers that follow a specific set of instructions. Using an algorithmic trading platform, you’ll be able to trade at a much faster rate than any human trader. Simply put, when it comes to executing tasks, computers are generally much faster than humans. In order to trade using this method, you will have to define trading algorithms that will instruct the computers how to act and use algorithmic trading software to carry out the trades.
Setting The Right Algorithms
If you design the right algorithms, algorithm trading can be highly effective. However, the trick is putting together the right set of instructions. You will have to define various things, like price, quantity, volatility, and any other piece of numerical information you can get your hands on. Then you will have to write up the instructions themselves, and have your computer execute the trades. You’ll need to monitor your algorithm. As time goes on you will probably have to adjust it to take into account changing market conditions.
High Frequency Trading Algorithm
Many investors like to use a high frequency trading algorithm that can execute trades very quickly, and carry out numerous trades per day. These high frequency traders often take advantage of small price movements. Instead of making a huge amount of money off of a small number of trades, many of these high frequency traders rely on making a small amount of money off of each trade. However, by conducting a lot of trades the money can really add up. So don’t be intimidated by what might seem like small returns. Over time high frequency traders can often make more than traditional traders.
Many investors love using algorithms because once it’s set up, you can let your trading handle itself. Yes, you have to keep an eye on your portfolio. However, you won’t have to think and analyze and even agonize before conducting individual trades. Just sit back and let the computer handle it, and if you designed the algorithms right, you should make money.
Testing Your Algorithm
Many websites now offer simulators and other things. So if you want to test out your algorithm, you may be able to do so without having to put money down. This will give you some time to tweak your algorithms and find one that really works. So make sure you consider training yourself before you jump into trading. A little bit of time and effort at the beginning could really pay off in the end. When it comes to investing, sound knowledge and a practiced hand can go a long way in producing big returns.
Computers for Algorithmic Trading
If you’re going to engage in any type of highly automated trading, one thing you should consider is your hardware. The difference between owning a top notch computer and a cheap computer you picked up at the local big box store could be the difference between success or failure when it comes to your investment efforts. There are many great trading computers out there that have been designed with high frequency and algorithmic traders in mind, so make sure you consider picking one up!
By now you should know the answer to what is algorithmic trading? Fact is, at the end of the day you will have to determine if this trading method is right for you. Are you good with math? Do you enjoy working with equations and computer programs? Do you have enough confidence to trust in yourself and to let your stock trading algorithms play out? If you’re looking for more information, you should consider picking up a book, like “algorithmic trading and dma” and reading up on the subject. We hope this introduction got you off to a good start! Good luck with your trading in the future!