Algorithmic Trading Strategies – A Tool all Stock Traders Should Know About

Algorithmic trading strategies are another tool that stock traders can use to gain a competitive edge in trading stocks. Therefore, in this article I will cover some common questions and answers about algorithmic trading strategies, briefly explain them and give a few examples of them.

What is an Algorithm? 

An algorithm is a precise set of instructions designed to carry out a specific job or command.

What is algorithmic trading?

Algorithmic trading is when traders use a computer program that buys and sells stocks based on data and instructions that are written into the computer code. These instructions are usually based on time tested formulas that traders have been using for decades.

What are algorithmic trading strategies? 

Algorithmic trading strategies are prethought, well planned techniques or game plans that use stock market algorithms to make the buying and selling decisions for the trader. Different programs use different strategies. The trader simply has to choose the computer programs that most fit his or her trading philosophy.

How is algorithmic trading different than blackbox trading and automated trading and algo trading?

It is exactly the same thing as algorithmic trading. People just use different words to describe them.

Are there any advantages to using algorithmic trading strategies?

Yes. They remove human emotion which can cause bad trade decisions and they can buy and sell much faster than a human ever could. You also have more liquidity or free cash more often. Sometimes they are more profitable than “using your gut”.

Are there any disadvantages?

Yes. If you are a trader who is great at using their instincts and intuition than you might want to avoid letting a computer make decisions for you. Also, have you ever seen a sci-fi movie where things with the computer don’t go exactly as planned? Think about it.

What are some examples of algorithmic trading strategies?

Trends 

These use different formulas based on stock trend and technical analysis. They are a great tool because rather than sitting up all night formulating your own trend analysis you let the computer program do all of the work for you. The best thing is you don’t have to be a mathematician because the program already knows how to do these things. You just have to find the programs that use trends in their code.

Arbitrage Opportunities

In simple terms this is when the program buys a position in one market and sells it at the same time in another market. The whole idea here is that you are profiting from the temporary difference between the two.

Index Fund Rebalancing

When Index funds get rebalanced the computer program is designed to take advantage of this so that you make a profit as a result. This is because the algorithm uses exact timing when buying and selling and it seeks the best possible price. Fund rebalancing is the exercise of moving assets from one form of the investment to another form. The aim is all about movement.

Mathematical Model Based Strategies

In this strategy the computer uses complex math based models. One example of this would be the delta neutral trading strategy. This strategy can often be complex and confusing to some traders so the algorithm does it for you.

Trading Range 

The algorithm uses historical price range data guessing that history will repeat itself and if it does you make profits.

Volume Weighted Average Price

This algorithmic trading strategy uses the average price weighted by volume formula.

Time Weighted Average Price

This strategy uses the average price of a security over a named time.

Percentage of Volume

This strategy uses volume as the main function. It targets a defined fraction of the overall volume on a stock for the predetermined time period.

Implementation Shortfall

This strategy focuses on automatically minimizing the costs between the decision price and the final execution price.

Other Trading Algorithms

There are so many other types. The key is to research the ones that appeal to your trading style.

If you know of any algorithmic trading strategies that were not included that you think are vital for helping our community members here at The Trade Locker please list them below and give a basic description. After all, the goal of The Trade Locker is to welcome any trader into our free stock market community providing they want to learn and help others become better traders at no cost. Also, if any of the information above can be explained in a better or easier way please do so as well.

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