Algorithmic Trading Explained – Here’s What You Need to Know

Last Updated on May 20, 2021 by MoneyVisual

Algorithmic trading may be a territory that is hard to explore. It helps with aspects like programming, trading, and quantitative analysis – things that might be quite burdensome to learn and put into practice. So, these are done on your behalf, allowing you to save time and focus on other matters. A lot of people use this form of trading because it doesn’t require too much maintenance. It also helps generate profits as it will not let any human emotions become an obstacle.

But if you’re new to this type of trading, you may not know exactly how it works. If you want to learn about this matter, this post will give you some insight.

What Is Algorithmic Trading?

Before we jump into anything else, let’s establish the definition of algorithmic trading. Algorithmic trading refers to a process that allows the user to use pre-programmed and auto trading instructions in order to execute some orders. It uses different codes, as well as chart analysis to join and leave trades. When there are any criteria determined, the trading algorithm will be able to buy or sell for you when the market conditions match the criteria.

Most of the time, this kind of trading is used by pension funds, hedge funds, investment banks, and mutual funds.

Why Do People Like Algorithmic Trading

Algorithmic trading is a popular option because it comes with various benefits as compared to other trading methods. Here is how it can make things better:

It Doesn’t Need a Lot of Maintenance

Unlike other trading types that might require more maintenance, algorithmic trading is a very low maintenance process. All you have to do is set up the algorithms, and they will do the job. They will start trading based on your schedule.

Less Likely to Make Human Errors

Humans change emotions for different reasons, and negative emotions might get in the way of trading. Errors may be made that way. Algorithmic trading helps prevent this issue, and actually cuts losses, and even generates more profit.

You Might Increase Your Opportunities

If you have any strategy, you can set up an algorithm based on it. Therefore, it will help increase your market exposure and ensure a bright future for you.

It’s Very Fast

Considering that all the algorithms are written first, you can execute the instructions instantly. Algorithmic trading lets you deal with a lot of indicators and very quickly. Thanks to this, your trades will be analyzed faster and executed much sooner, bringing a lot of opportunities.

Smaller Price

People also like the fact that algorithmic trading is not as risky when it comes to money loss. In fact, you will not have to worry about losing money. This is because you don’t have to waste all your time monitoring the markets. You can go on with your day while the trading gets done.

How to Become Good at Algorithmic Trading

If you’re interested in algorithmic trading and want to become good at it, then you have to go through different steps. Learning algorithmic trading takes some time, but if you consider all the areas we’ll discuss below, you have great chances of getting good at it.

Get as Much Knowledge as Possible

The algorithmic area is pretty complex, meaning you have to do your homework before considering this territory. There are three main things you will have to learn, respectively programming, quantitative analysis/modeling, and financial/trading markets knowledge. Learning them will help you avoid trading mistakes.

Programming is very important as it’s one of the keys to algorithmic trading. You need to learn and practice as much as possible. For example, MQL4 and MQL5 services are only some of the things you should learn about. You can try using a coding program to practice your skills. Some great options are Java, Python, and C++.

Quantitative analysis is also an important aspect of algorithmic trading. If you wish to work for any trading firm, you must know how to solve problems. That being said, you should look into historical data from various exchanges, and work on new algorithmic trading strategies. Other than that, you must be able to work on time-series analysis, statistics, and so on.

Lastly, you also need trading knowledge. Knowing enough about trading markets will help you a lot. Therefore, learning about risk management, arbitrage opportunities, trading instruments and types of strategies is crucial.

Use all the resources available to start learning. This includes books, videos, blogs, podcasts, webinars, and, why not, online courses.

Get all the Things that You Need

In order to get started with algorithmic trading, you require some equipment. The basic one is a computer or a laptop, something you most likely own or you can obtain. Also, if you’re just getting started, you don’t even need something expensive. As long as you have a computer with at least 8GB RAM and 4 or more cores, it will work.

You need a good Internet connection, as well as a remote server subscription to start trading. Make sure you have enough storage disks and space to be able to keep all the trading codes and files, and you should preferably use some cloud storing services as well.

Use the Right Broker

Next, you should register with a proper broker, as it will help connect your trade orders to the market. There are some that give you market data and a trading platform, although not all of them do. You also need to make sure that all your trading software is prepared, and have your trading screen set up.

Come Up with some Trading Strategies

Doing some research into trading ideas will help you create your own trading strategies. Make sure you code and backtest the strategies you created, and then forward-test them. The better they are, the more likely you are to be successful and become a good trader.

Implement the Algorithmic System

Lastly, you should implement your algorithmic system. This one will do the trades for you. You should still check it out now and then, preferably once every day. In order to protect your trading capital, you should also set your risk management parameters.

Final Thoughts

Algorithmic trading may feel challenging, but once you learn the basics, it should all go smoothly if you know what to do. Use this article as a guide for your future algorithmic trading ventures.

1 thought on “Algorithmic Trading Explained – Here’s What You Need to Know

  1. Algo trading is gaining popularity in India. Main thing is human emotions are not involved. That makes trading a lot more simpler

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