Know About Key components For Trading Algorithmic System Identifying the Strategies, Backtesting the strategy, Executing your strategy, Manage Risk, Technical Requirements.
Algorithmic (Algo) trading also called automated trading or black-box trading is the new era of stock marketing. Those who are deeply involved in algo trading found this system worth using and investing time on for its multiple features and real-time trading ability. Algo trading is a complex method using mathematical routes to understand and gain profit. Automates stock marketing comes with defined sets of instruction based entirely on timing, price, quantity, and mathematical model.
Here is the short example of algo trading –
- A trader buys 50 shares of stock when it is in the 50-day moving average going above the 200-day moving average.
- Sell shared of the stock when its 50-day moving average goes below the 200-day moving average.
By using these two simple instructions, the computer program will monitor the stock price. It will then place the buy and sell order if the condition is met. The traders do not have to monitor live prices and graphs because the system would do it manually.
To use and gain profit from automated trading, the user needs to understand critical components. However, let us first check some of the benefits of an algorithmic trading system
- Every possible trade is executed with the right price.
- Instant order placement and accurate
- Traders get a real-time update on price change to trade rightly
- Automated checks on multiple market conditions
- Reduced risk of manual errors while placing possible trades
- Reducing the possibility of mistakes from human traders
Key Components of Algo Trading
To perform Algo trading, the trader should know the key components. These strategies can improve your costing and earnings-
- Identifying the Strategies
To have successful trading using the software method, it is essential to identify strategies on which market is suitable for trading. This will allow developing logic before trading. The best thing about using trading software is it automatically trades if it finds the stock suitable.
- Back testing the strategy
Stock trading or marketing entirely relies on testing the data. Algo Trading software comes with historical data that allows you to backtest the previous trading and according to work on strategies. Here, you will also need to work on proven mathematical models like- delta neutral trading strategy.
- Executing your strategy
Once you have backtested the previous data, you can execute the idea based on transaction costs. There is a cost of trading and commission, which you will need to work upon to ensure you do not have to pay beyond the required limit.
- Manage Risk
Once you have executed the trade, it is vital to manage risk by creating pre-and-post trade checks. This will help in avoiding losses.
- Technical Requirements
For successful Algo trading, you need to be technically upgraded like-
- Computer-programming knowledge for trading strategy hired programmers, and pre-made trading software.
- Network connectivity and access to trading
- Ability and infrastructure to backtest the system before it goes live
- Ability to avail and learn historical data for backtesting
ABOUT THE AUTHOR: Amit Sen, technology articles.