Understanding Algorithmic Trading Strategies

Algorithmic trading, like that offered by FxPro, is where specially programmed computers are used to place trades. These take place at a speed and frequency that would be impossible for a human trader to replicate. The method has many benefits for serious traders:

  • It ensures that trades are executed at the best possible price
  • Executes instant and accurate trades
  • Times trades accurately to avoid unfavourable fluctuations in price
  • Reduces transaction costs
  • Eliminates the risk of manual error
  • Removes negative emotional and psychological factors that can affect human traders.

Most commonly, this method is used in high frequency trading, which seeks to capitalise on placing a significant number of orders at an incredibly high speed across multiple markets in order to maximise profit margins.

scasdcAlgorithmic Trading Strategies

There are many different algorithmic trading strategies in existence. Some of the most common are…

Trend Following Strategies

Trend following strategies are what they say on the tin: they follow trends, whether these are in moving averages, channel breakouts, price level movements or related technical indicators. This is perhaps the simplest strategy, as the algorithm is not required to make predictions or forecasts. Rather, trades are made on the basis of desirable trends that are identified by the trading platform.

Arbitrage Opportunities

Arbitrage strategies work by simultaneously buying and selling stock from one market into a second, where it is priced more highly. This dramatically reduces the buyer’s risk, as the programme identifies an instant profit making opportunity and executes the trade immediately.

Index Fund Rebalancing

Index fund rebalancing is a little harder to understand. Basically, index funds go through periods of rebalancing, where holdings are brought in line with benchmark indices. This can offer algorithmic traders the opportunity for profit, as expected trades can offer 20-80 basis points profits according to the number of stock in the index fund prior to the rebalancing. Algorithmic systems ensure that the best prices are secured.

Mathematical Model Based Strategies

Mathematical models are complex and often require quite a lot of technical knowledge. They allow trades to be executed on a combination of options. The delta-neutral strategy is one of the most popular, and works by placing trades that offset positive and negative deltas to maintain a portfolio delta of zero.

Trading Range (Mean Reversion)

Mean reversion strategy is a little simpler to understand than the aforementioned concepts. Basically, it works on the idea that assets always have a mean value, and that they regularly revert to this. A price range is identified, and the computer places trades when the price of the asset exceeds or falls below the defined range.