Algorithmic Trading

Algorithmic Trading What is an algorithm ? Algorithm is defined as a set of instructions to be followed by a computer to solve a problem with desired results. Almost all electronic devices follow some algorithm to accomplish given tasks.

Algorithmic Trading

What is an algorithm ?

• Algorithm Is Defined As A Set Of Instructions To Be Followed By A Computer To Solve A Problem With Desired Results.
• Almost All Electronic Devices Follow Some Algorithm To Accomplish Given Tasks.

What is Algorithmic Trading ?

• Algorithmic Trading Is The Approach To Automate Trades Based On A Predefined Set Of Rules I.E. Algorithm.
• It Can Be Used To Place Buy And Sell Orders Almost Instantaneously By Following A Predefined Strategy Which
  Is Devised Based On Trading Styles And Other Factors Like Time, Price And Volume.
• Algorithmic Traders Use ‘High Frequency Technology’ (HFT) Which Enables A Firm To Place Thousands Of Trades
  Per Second.

• This Approach Doesn’t Require The Manual Hassle Of Placing Orders At Time And Can Be Done Automatically.
• Moreover, One Can Even Backtest His Or Her Strategy On Past Data To Test Its Accuracy And Significance Before
  Implementing It On The Current Market Scenario

Types of Algorithmic Trading.

Some well-known Algo trading strategies are listed below :

Arbitrage

• In this strategy, we take advantage of the price difference of the same asset on different exchanges.
• Specific Algorithms capitalise on this strategy and quickly observe different exchange prices to place an order to obtain maximum profit.

Mean Reversion

• Mean reversion strategies calculate the average price of a stock over a given period of time based on a few past indicators and previous price data.
• Assuming that the price will always revert back to its mean value.
  1. IF Stock price < Mean Price : Buy Order
  2. IF Stock price > Mean Price : Sell Order (Optimal Price)
• The optimal price can be decided based on past indicators and is selected to achieve the most feasible amounts of profit.

Mathematical Model based Strategies

• There are certain proven mathematical models for option based strategies which evaluate certain parameters and place orders based on the changes in those parameters
• Some of the well known model based strategies are shown below:
  1. Delta neutral strategy
  2. Theta neutral strategy
  3. Vega neutral strategy
  4. Iron Condor strategy

Market Timing Strategies

• Market Timing strategies use hypothetical testing of assets via backtesting to build a model for trading.
• These strategies are used to test how an asset will perform over time.