Algorithmic trading is the next best thing in the world of trading. And it can make the whole trading process automated and easier for everyone.
You need to feed the algorithm some predetermined sets of instructions, such as when to enter and exit the market, and the computer will then do your bidding by applying the instructed rules.
Although traders will handle the trades entirely, the algorithms that do such a job are generated manually.
Let’s have a quick look at the various trading strategies that are used by traders all around the globe.
A Strategy That is Based On Momentum and Trends
This one is the simplest yet most widely used strategy. The algorithmic trading software helps you follow the trends and momentum in the market, and the process is executed simultaneously. The right strategy also accounts for the historical data collected on the stocks. A suggestion is made on whether the trend will last or change at a moment’s notice.
A Strategy Involving Arbitrage Opportunities
Arbitrage opportunities arise when the prices for the same stock differ in two markets. It can happen due to insufficient information or a delay in passing the data from one market to another.
Either way, the arbitrage opportunities occur in a tiny window and go as quickly as they arise. The algorithm can detect these small changes and perform trades, which could be beneficial for you as a trader.
For this to occur successfully, the algorithm should get data from all the relevant trading servers. As, when an arbitrage opportunity arises, the algorithm can take quick action.
A Strategy Involving Arbitrage Based on Statistics
It is a short-term algorithmic trading strategy based on the trading opportunities that arise due to insufficient data or misquotation of the data. This can occur in similar yet different types of shares. But, this arbitrage opportunity never stays for long. Therefore the algorithm has to be smart and efficient enough to act in that particular window.
A human might not be able to act that efficiently in such a small window, and thus delegating this work to the algorithm is beneficial.
A Strategy Involving Mean Reversion
This strategy depends on the fact that the markets can fluctuate, but will always return to a mean value at some point. In the market, this strategy is also referred to as a reversal or counter-trend strategy.
The algorithm detects the lowest and highest price of a share/stock and then executes the orders when it deviates from the mean value. The benefit of this strategy blooms up when a trader is expecting a change to occur in stocks.
But, the strategy can backfire as well when the prices are not changing according to the trader’s expectation. You should be wary of such situations and prepare well.
A Strategy Involving Weighted Average Price
A strategy such as this one is also quite efficient when applied to algorithmic trading software. It can be of two forms: volume-weighted or time-weighted average price.
Basically, in this strategy, the orders are released in parts and not as a whole. This is decided based on the historical data involving volume or pore defined timing slots.
It has only one objective, which is to complete orders as close as possible to the weighted average price.
Algorithms play a considerable part in releasing the order in small portions, which can’t be executed with the same efficiency when performed by a human.
So, this article surmises all the possible strategies an algorithm can perform while doing trading. The algorithms can also be designed according to your needs. The strategy will always depend on what the trader decides to execute.