Imagine having dedicated computerised programs that can browse markets at lightning speed and highlight trading opportunities for you to make profits. With algorithmic trading, this is no longer a figment of your imagination.
The American financial markets first started using computerised trading systems in the 1970s. And by 2009, more than 60% of all trades in the U.S. were executed by computers. With the turn of the century, algorithmic trading is making its way to mainstream trading. Let’s take a closer look at what it is, and how you can get started with it.
What is Algorithmic Trading?
Algorithmic trading, commonly known as algo trading, involves training computer programs to execute trades on the basis of predetermined rules and regulations. The algorithms are created by traders or brokers and often specify the time, price, and volume for buying or selling an asset.
The advantages of algorithmic trading include:
Speed: Trained computer programs can execute trades faster than humans. This is especially common for high-frequency trading, a type of algo trading that can execute a high number of trades within milliseconds.
Reduced human error: Algorithmic programs are less likely to make common errors. This can increase the efficiency of your trades and help ensure greater profits.
Greater control: While it doesn’t look like it at first glance, algo trading can offer greater control. As a trader, you can set limits for your asset volume, prices, and positions.
Backtesting: Algorithms can be backtested and trained using historical data. Traders and brokers can review the effectiveness of algorithms before deploying them in live trading. This will reduce risks and ensure peace of mind.
How Do I Get Started with Algorithmic Trading
Knowing what algorithmic trading is one thing, and executing it under live market conditions is another. You need to learn specialised strategies and have access to certain tools to yield favourable results. Let’s learn about how you can start executing algo-trading:
Choose an Asset Class
The first step is choosing an asset class you’re interested in. This could be forex, bonds, stock, commodities, options, or futures.
Tip: Algorithmic trading is most effective in highly liquid financial markets like forex and stocks.
Learn a Bit of Programming
While some trading platforms offer no-code algo-trading opportunities, knowing a little bit of programming can be helpful. Python, C++, and Java are commonly used in creating algorithms.
Select the Right Trading Platform
Choose a platform that supports algorithmic trading. MetaTrader 5 is one example. It features the MetaQuote Language 5 (MQL5), which allows traders to test their programs and even create Expert Advisors (EAs). With the MT5 download, you can seamlessly develop algorithms and expand your portfolio.
Develop Your Trading Strategy
Revise your understanding of market conditions and indicators and create your trading strategy. Collect and analyse historical data. As mentioned earlier, algorithms can be backtested to measure their effectiveness. Moreover, reliable trading platforms like MT5 allow seamless backtesting.
Continuously Monitor
Once you’ve created your trading strategy, take positions and execute trades. Closely monitor the performance of your trades and make adjustments where needed.
Also Read: 10 CFD Trading Tips to Maximize Your Profits
