Basics Of Algorithmic Trading That Every Trader Should Know

When it comes to trading, speed and emotional detachment is crucial to the success of the trading business. Speed because opportunity comes in the most unlikely places and events and emotional detachment since emotions can affect whether future trading will be a success or a loss of opportunity when a trader loses huge amount of money from the first trading.

Many large businesses today make use of algorithmic trading which is an automatic trading tool that is programmed to do trading on behalf of the trader whether it is stocks, bonds, commodities, Forex or options. Algorithmic trading is used by many trading companies and has helped them to earn high profits even during market declines.

What makes the trading tool effective is that it is run by expert traders, often pre-programmed with trading instructions thus reducing errors that human traders often commit. The system makes use of advanced math models or instructions to calculate and make trading decisions based on the facts that it receives. This allows traders or account holders to view the best possible price they can get without affecting costs and stock prices.

Algorithmic Trading Strategies

Automatic trading has since been popular especially among large trading companies and different algorithmic trading strategies have been developed. One of the popular ones is the High Frequency Trading or HFT. HFT takes into consideration three things: multiple markets, market conditions and the levels of liquidity. Once these factors are compiled together, the platform uses complex algorithm to analyse the data it receives and execute the orders implemented by the trader. HFT includes market making, statistical arbitrage and event arbitrage.

Trading Practices

Before entering into an algorithmic trading practice, traders must first understand the type of fund they are investing. Some funds concentrate on money market or currency pairs, stocks, precious metals such as gold, silver and other industrial metals. Each fund has its own benefits as well as risk which should be taken into consideration. If your risk appetite is high, funds that are deemed high risk but high return is the best; however, for those with low risk appetite, funds that have low inflation rate such as investing in precious metal is ideal.

Many of the algorithmic trading platforms include money management controls, current news and reports and calendar and volatility filters that can help traders analyse current market conditions. Some platforms also provide traders with offsetting futures in certain instances when they want to prevent losses due to the volatility of the market.

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