Business

Effective Strategies for Algo Trading and How to Create Them

Diving into the all-new world of algo trading can be an exciting experience and equally overwhelming. There are countless different approaches to develop your own strategies for successful algorithmic trading. So, if you are a beginner it can be intimidating as you are unable to assess the risk.

To ensure that you follow the accurate strategies or develop accurate strategies, you can continue reading to understand a few basic things about the quantitative trading process. It is essential to improve your understanding in order to calculate the implications of the strategies.

Mean reversion

It is a good idea to start with one of the most common strategies that work for algorithmic trading: mean reversion.

For example, if the market shows a huge upward graph in one week, you can bet that the market won’t grow further in the next one month. And you can also expect that the next month’s move will be closer to the average price.

The mean reversion strategy will suggest using one or more of the multiple moving stock price averages and trade during the average and current price discrepancy. This will be profitable only when you are doing it in a pair with another stock that has a consistent co-relation with the particular stock’s price.

Momentum in Algo Trading

And here comes a different strategy for the trading, namely the momentum strategies. The concept is pretty much the opposite of the mean reversion strategy. Instead of betting your profit on the price that returns to the same state, momentum strategies aim to use the profit from the continuation of the same move.

  • The classic momentum strategy of algo trading is a “gap and go” strategy where you have to look for the overnight gapper and bet on the continuation of the move.
  • Another popular style is to look at events or news that will directly trigger the upward move of the process of the stocks in certain categories.

You can even pair up the news with the overnight gaps to make an advanced strategy.

Market making

A strategy based on the execution of orders can turn out to be profitable. You can deploy the strategy when a big financial institution or bank is trying to open or close a position. Instead of making an unfavorable entry or exit prices, these institutions open or close the position in many different but smaller orders.

Although dividing the orders does not solve the problem, but it will give you the option for finding the best possible places to invest for algo trading.

Calculate and research

You cannot actually stick to a particular strategy in the algorithmic trading world as the world is too dynamic. Data, statistical calculations, and continuous changes in approaches can bring massive changes in the stock process overnight. So, you should prepare yourself through extensive research and data for the trading.

Regardless of the strategies you implement, you have to apply solid risk management practices for algo trading India. It is mandatory as the market changes frequently, and you will take time to learn the influencing factors that trigger sudden upward or downward curves in the market’s financial status.

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