Algo trading uses computer algorithms to automatically execute buy and sell orders in financial markets. Keep reading to learn how to get started with algo trading, some common algo trading strategies, and the key benefits of algorithmic trading.
Getting started with algo trading:
1. The first step is to create a trading strategy. This could be based on price movements, technical patterns, or other market factors.
2. The strategy is then coded into a computer program. Python is a popular language for this due to its ease of use and powerful libraries.
3. Before using the algorithm in real markets, it is backtested against historical data to see how it would have performed in the past. This helps refine the strategy and improve its effectiveness.
4. Once the algorithm is ready, it can be connected to a trading platform to automatically execute trades.
5. Try to monitor the algorithm to make sure that it performs as expected. You may need to make adjustments based on changes in market conditions.
Common algo trading strategies:
1. Volume Weighted Average Price (VWAP). VWAP aims to execute orders close to the volume-weighted average price, spreading the trades over a specified period to match the market volume.
2. Time Weighted Average Price (TWAP). Similar to VWAP, but focuses on executing trades evenly over a set time period to minimize market impact.
3. Percentage of Volume (POV). This strategy executes trades based on a predefined percentage of market volume, adjusting the execution rate according to market activity.
Key benefits of algo trading:
1. Efficiency. Algorithms can execute trades in milliseconds, allowing traders to capitalize even on small market movements.
2. Emotion-free trading. Algorithms follow strict rules and are not swayed by emotions. This removes the risk of impulsive decisions driven by fear or FOMO.
Learn more: What Is Algo Trading and How Does It Work?