Trading stocks requires careful consideration of the many different approaches available to optimise portfolio performance. Algorithmic trading is one such strategy focused on automating trading activities as much as possible. To begin a successful trading career, it is important to be familiar with the concepts of algorithmic trading and the strategies associated with it. Here, we explain the fundamentals of algorithms in stock trading and provide some approaches for beginners.
At its core, algorithmic trading is the use of computer programs to analyze and execute trades based on input and outputs that are created from a set of predetermined rules. It is becoming increasingly prevalent within today’s markets, where the vast majority of transactions are automated and determined by algorithms. This method can be utilized by traders of all levels, from beginner to experienced, as it largely removes the emotion from the trading process.
In algorithmic trading, traders can use a variety of different strategies, from scalping and market making to trend following and arbitrage. Scalping is a strategy which attempts to make quick profits from small price movements and is commonly used in highly liquid markets. Market making is a slightly more complex strategy, allowing traders to benefit from the spread between bid and offer prices. Trend following relies on the ability to identify trends, and is often conducted over multiple time frames. Meanwhile, arbitrage seeks to exploit pricing discrepancies between multiple markets, enabling traders to buy stocks in one market and simultaneously sell them in another, profiting from price differences.
For novice traders, a sensible approach should include a combination of trend following and scalping strategies. It is also prudent to maintain a trading journal, recording all trades and the results of each, as well as any other insights gained from analysis. Such records are extremely helpful in both formulating strategies and identifying errors.
It is also important to use professional grade software to trade. Such programs often contain complex algorithms to identify trends and place trades, making them a worthwhile investment. Additionally, traders should take the time to accurately backtest their strategies prior to implementation, ensuring that the strategies are appropriate for their chosen markets.
To further enhance performance, traders should focus on developing an understanding of technical analysis, rather than relying exclusively on automated strategies. Technical analysis and indicators have been used for many years, with traders relying on them to identify areas of potential entry and exit in the markets. While algorithmic trading may have an element of human intuition involved, technical analysis can often provide a more comprehensive approach towards making trading decisions.
Overall, algorithmic trading is an effective tool for all traders, from novice to experienced, as it removes emotions from the trading process. As such, it is important to familiarize yourself with the fundamentals of algorithmic trading and the various strategies available. Additionally, take the time to set up accurate backtesting and use technical analysis to hone in on the best entry and exit points. With the right combination of strategies and dedication, novice traders can significantly improve their performance.
