6 min read · Nov 17, 2023
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In today’s world, technology has become an integral part of our daily lives. From reading the latest news in the morning to the last dessert you eat at night, we live in a world surrounded by technology. Among all these, the trading business has also found its advancements. Algorithm Trading, or algo trading, is a new-age trading practice that beats the human trading practice and helps gain more profit than humanly possible.
In today’s article, we will talk about Algorithm Trading and its top seven strategies you should practice to get the best return on investments. What are you waiting for? Read on and turn your investment into gold now!
If we put it in simple words, Algorithmic Trading is a method of executing financial transactions with the help of computer algorithms that follow a predefined set of rules. These algorithmic tools are often designed to make decisions about buying or selling financial assets, such as stocks, bonds, or even cryptocurrencies.
You see, you do not need to keep an eye on the stock market around the clock. Now, algo trading software can do these things. This minimizes human errors and executes trades at the best possible prices so you don’t miss any golden opportunity.
Imagine you have a tool that monitors a company’s stock price and tracks news headlines about that company. When the tool detects any positive news event, like a favorable earnings report, it may automatically buy shares of that company’s stock. Conversely, if it detects negative news, it could sell the stock.
Even Fortune Business Insights reported that the global algorithmic trading market size was valued at $2.03 billion in 2022 and is projected to grow to $3.56 billion by 2030. This shows the confidence and how businesses trust Algorithmic Trading.
Now that we know how businesses are getting the best out of stock trading with algorithmic trading software, let’s look at the top Algorithmic Trading strategies that have become a need of the hour.
As we said earlier, Algorithmic Trading is all about writing smart computer algorithms to help you make profitable transactions. It’s like having a bunch of different tools in your trading toolbox. You can swap one tool for another, depending on your requirements. Let’s discuss them.
Momentum
Momentum trading is a classic day-trading strategy that’s been around for ages, like over 80 years! It was just a matter of time before traders thought, “Hey, let’s use tools to make this even better.” So, what’s the deal with momentum trading? Well, it’s all about predicting future values based on what’s happened in the past.
Now, let’s break it down with a simple example. Imagine a stock’s price is on the rise — the algo trading software will say, “Buy that now!” You buy the stock, ride the wave as it goes up, and then, when it hits a certain point, you sell it. It’s like catching a good wave if you’re a surfer.
Trend Following
Trend following, also called time-series momentum, is like a brother of momentum trading. It’s all about making money by betting that an asset’s future price movement will follow the same direction as its past price movement.
You see, following a trend is like a research project you have been working on for a while. You need to check out things like when a stock breaks out of a range, if there’s a sudden jump in trading volume, or if the market gets all jittery (that’s volatility for you).
Risk-on/Risk-off
Investors are one of the key factors when it comes to the business. Wouldn’t it be amazing to know the pulse of the investors — if they are brave enough to take risks in the global economy? With a Risk-on/Risk-off strategy and an algo trading tool, you can bet according to how investors feel about investments.
Putting this into action can be a bit of a brain workout. You need to monitor several things like actions and statements made by global central banks, how businesses are doing and economic data from around the world. The research can be exhausting, you bet! But that is where this algo trading software comes in handy as it can collect all this data and tell you if the risk is heating up or cooling down.
Arbitrage
Arbitrage investing is a money-making trick when you simultaneously buy and sell the same assets but in different markets. The idea is to make a profit from tiny price differences, like those super small price gaps.
It works best when you spot quick price changes for the same asset, but it’s in different forms and markets. To really cash in, you’ve got to be spot-on with your timing when you buy and sell. That’s where the algo trading tool comes to the rescue. It can closely monitor the markets, figure out the perfect time to make moves, and do it even faster than a human trader.
Black Swan Catchers
Do you know what a ‘Black Swan Event’ is? It’s like when something unexpected happens way out of the blue, and it can cause some major financial chaos. Think of the Global Financial Crisis or the COVID-19 pandemic — those were black swan moments.
Now, here’s the deal with ‘Black Swan Catchers’. It’s a clever investment move that takes advantage of all the ups and downs in the market after one of these unpredictable events with the help of Options Contracts that tend to go through roofs under such circ*mstances.
Market Timing
The stock market is always about the perfect timing — the perfect timing to buy or sell the stocks in the market. But let’s be honest, it can be a bit of a gamble. You might wait for a rock-bottom price, and then it drops even more after you buy. Or you could sell something when you think it’s at its peak, only to see it keep climbing.
Here’s where algorithmic trading software comes in. It looks at what’s happening in the market right now and compares it to what’s happened before. This helps determine if your timing is on point so you do not miss out on any good opportunities and avoid false alarms.
Inverse Volatility
Inverse Volatility algorithmic trading is about cashing in on the inverse relationship between volatility and asset prices. You see, when volatility increases, asset prices tend to drop, and when the storm calms down, the prices tend to bounce back.
The algo trading tool spots the timing when things get shaky and decides it’s time to make some moves. These strategies are a bit fancy and usually used by expert algo traders. They’re looking to make a dollar because they believe that the market will bounce back to its normal behavior over time. And mind you, it’s not just a guessing game — they use numbers and charts to figure out when things might change, and that’s when they make their moves.
Trading in the stock market will always have risk factors. Many traders have made bucks out of it, and many people have also suffered huge losses. While new technologies are transforming different industries, it will be interesting to see how emerging technologies like Artificial Intelligence and Machine Learning will help us make a profit in the stock market.
Algorithmic Trading is widely accepted, and traders and investors must learn to live with it. While Algorithmic Trading has brought computer programmers and financial experts together, it has also added some liquidity to the security market. With the help of algorithmic trading tools, investors can perform high-frequency trading and get the best out of the stock market.
However, when it comes to profitability, it is vital to choose the right trading strategy — be it Arbitrage or Momentum. Your stocks and requirements determine the strategy you should opt for. Make sure you choose your strategy wisely. Happy trading, folks!
