Algorithmic trading uses computer programs or codes which are predetermined and set.
A trader sets a program in the computer which can trade itself when certain conditions of the market meet with a program which is set by the trader.
A trader sets the program according to various concepts like timing, quantity, price, or any other mathematical analysis. Algorithmic trading allows traders to generate much more profits, which are not possible for him doing manually. Algorithmic trading is done according to set-rules, as there are no human emotions involved in it.
Examples of Simple Algorithmic Trading:
- Short 10 lots of USD if the USD rises above 1.2012.for every 5 pip rise in USD, cover the short by 2 lots. For every 5 pip fall in USD, increase the short by 1 lot.
- Buy 10,000 shares of Amazon (AMZN) if the cost falls below 3200. For every 0.1% increase in cost beyond 3200, buy 500 shares. For every 0.1% decrease in cost below 3200, sell 500 shares.
Example of Moving Average Algorithmic Trading:
Moving average algorithmic trading is very admirable and easy to execute. The algorithm purchases the stocks if its current market cost is below average cost for some time and sells the stocks if the current market cost is more than the average cost for some time. This we will consider as 20 days moving average algorithm trading.
The algorithm purchases stocks in Amazon (AMZN) if the current market cost is less than the 20-day moving average and sells Amazon stocks if the current market cost is more than a 20-day moving average.
Reduces Market Impact:
A vast trade can possibly change the market cost. This trade is known as a distortive trade as it distorts the market cost. To avoid these conditions, traders typically open significant positions which can move the market in pace.
Suppose, a trader is willing to purchase one lakh shares in Amazon might purchase the shares in the batch of 500 shares. A trader might purchase 500 shares in every five minutes for one hour and then rate the impact of the trade on the market cost of Amazon stocks. If the value remains the same, the trader will keep continuing the purchase. This technique allows the trader to purchase Amazon shares without raising the market cost. However, this technique comes with two main drawbacks.
- If the trader is getting charged with a fixed fee for each transaction, then this technique will increase its transaction expenses.
- This Technique takes a specific time to complete the trade. In this case, if the trader buys 500 shares for every five minutes, it would take almost 17 hours to complete the transaction.
Assures Regulation-Based Decision Making:
Traders often get swings with emotions and sentiments and disregard their trading techniques. Suppose the financial market shows the signs of crises, but a lot of traders ignore the signs because they are caught by other exciting elements in the rising market and think that the crisis is not possible. The algorithm solves the issue by assuring that all trades are stuck to predetermined sets of regulations.
Lose some Trades:
An algorithm trading can lose some trade as it doesn’t reveal any of the signs which the programmed algorithm is looking for. It can reduce to a specific level by a simple rise in numbers of indicators the algorithm is looking for, but such a list will always be incomplete.
There are many algorithmic trading strategies. Many traders trade with price action strategy or technical analysis strategy, but some of them combine both methods.
Old open/close or high/low levels of candlestick charts are used in price action strategy to place orders in the future when old price points are accomplished again.
Technical analysis strategy is dependent on technical indicators to examine the chart and algorithm will act in the market according to what indicators shown, like low or high volatility.
Algorithmic trading is straightforward to execute if you understand the market correctly and set the program and the coding according to that it will help you to make significant profits and save you timings. If you want to know more about algorithmic trading and which brokers provide this strategy you can visit www.fxreviews.best