Algo trading or an automated trading is the most demanding way to plan your forex trading. Here is a detailed guide about what algorithm trading is and which platforms performs with the best functionality.
Whether you are a newbie or an advanced trader, using an automated Bitcoin system to perfectly organize your portfolio of investments is invaluable. No trader can predict changes of trading market as they happen, but algorithmic trading can be of great help in this regard.
Like every good investment trading strategy, algorithmic trading also has its advantages and disadvantages. Some regulators hold quite negative remarks for algorithm trading as it can have negative consequences on financial stability especially at crucial times when stock markets are falling, but that doesn't mean that there isn't a place for algorithm trading. The technology should be used in collaboration with some dynamic management to complement your trading strategy, and in this article, we will share our top strategies.
Keep on reading to get a detailed insight of what algorithm trading is, how to begin with trading, and which providers give the best functionality and services to help take you lead in the marketplace.
There are several providers who give the services of algorithmic trading strategies. We have compiled a list of some top-notch brokers for you to choose for algorithm trading. We have sub-divided the list to display providers that offer their services in forex, cryptocurrency trade, and stocks.
Features of best algorithmic trading sites
The best algorithmic trading functionality sites are based upon the following factors:
- Broker's stance in the marketplace and their reliability
- Availability of multiple strategies
- Charges and Fees
- Trading platform responsiveness and efficiency
Steps Towards Algotithm Trading
Step 1: Set up a Trading Account for Algo Trading
The first step to begin with algorithm trading is to open a trading account with a trader that provides and implements algorithmic trading strategies. We have compiled a list of reputable brokers for you to select from depending on the type of trading and budget you wish to get involved in.
Step 2: Learn Tactics of Algorithmic Trading
An algorithm is in fact a set of rules or suggestions that are targeted to solve a problem. Generally, human intervention is not needed when the algorithm is already set. Like all other strategies of trading, algorithmic trading is targeted to limit human intervention in any type of trading. Algorithmic trading also refers to algorithm trading, a black-box trading or an automated trading.
In simple words, algorithmic trading is used to say good bye to manual trading. So instead, a computer places your order without any problem. So, the human intervention is not needed in any such type of trading. There are generally five steps in algorithmic trading.
Firstly, you need to plan a trading strategy. Algorithmic trading mainly involves technical analysis. Once you have planned to opt the type of trading, you need to implement it to backtest the results.
If the back-testing outcome depicts that the strategy is giving positive returns, we move on to the third step which is setting up the algorithm. In the third step, we set up the algorithm and automate our trading platform. In the fourth step, the trading is done live through the algorithm.
While algorithm trades don't utilize the human intervention and the trade is opened and exit automatically, but that doesn't mean that you are free from supervising the trades and the algorithm model itself. There have been many situations when uncontrolled algorithm trades have taken wrong decisions in financial markets.
Also, the trading strategy that you adopted may also need further polishing later. The fifth step is to monitor your trades and also have an insight into the algorithmic trading model.
An insight into the pros and cons of using algo trading
- No human intervention and the impact of their emotions
- Trades are conducted faster and at profitable rate
- Reduces trading charges
- Organizes your trading strategy
- Easily back test your trading strategy
- Technical problems may arise
- Back testing works only at initial phase
- Supervision of trade is still needed
Step 3: How to Choose the best Algorithmic Trading Strategy
You can implement and adopt any strategy in algorithmic trading. Here is a list of the widely used trading strategies.
Many traders use moving average and moving average crossover as mode of experienced indicators for buying and selling. Simply, we can get a price crossover. Whenever there is a situation of security's price rising above or below a moving average, it notifies a possible trend reversal. There are basically two main moving average crossover strategies.
- Golden cross: It is the situation when the short-term moving average goes above the long-term moving average, here is indicates bullishness and a buy signal. Generally, the 50-day simple moving average is always used for the short term and a 200-day moving average for the long term.
- Death cross: A death cross is the exact opposite of the golden cross. When the 50-day simple moving average goes below the 200-day moving average, it is considered as a death cross.
Relative Strength Index (RSI)
RSI refers to the indicator of momentum. The value of RSI usually varies between 0 and 100. RSI values indicate different phenomenon like below 30 indicate that the security is oversold while, an RSI above 70 signifies an overbought position. You can make use of the RSI for any number of days but in general, the convention is to use the 14-day RSI.
Moving Average Convergence Divergence (MACD)
MACD is usually differentiated between the 12-day exponential moving average and 26-day exponential moving average. Positive MACD values symbolizes a positive momentum while negative MACD values typically shows a downside momentum.
Put call ratio (PCR)
The PCR ratio is considered as the number of put options divided by the number of call options. You can also analyze PCR ratios at varing strike prices. A majority of the, traders see PCR ratio of more than 0.7 as an indicator of bearishness and ratios below 0.5 as a bullish indicator.
Support and resistance levels
In very clear terms, support is a level at which there is a potential buying interest in a stock price. Support and resistance prices are not stable and keep on changing continuously. A majority of tools including moving averages can be utilized to determine a security's support and resistance levels. Depending on their analysis, different traders possess different support and resistance level. There are many exist multiple resistance and support levels for a single security.
- Support level: Occasionally, stock prices usually get higher after hitting the support price. The basic point here is that as the stock price falls, it becomes appealing for some traders. While a security price can result back from the support levels, it can even fall below the support price. Security price falling below the support line is indeed a bearish indicator.
- Resistance level: It is the point of price at which the security falls despite of the selling pressure. Whenever the security price increase, many investors book profits and we observe potential selling prices at the resistance level. However, when the security's price goes above the resistance level, the roles are interchanged and resistance level becomes the support level.
Automated trading has surely gained a sudden popularity due to its enormous advantages. If you consider yourself a technically savvy and have a safe hands-on trading strategy, you can easily build your own algorithms. For others, you can use custom algorithms provided by some top-notch traders, to allow you to generate a more profitable trading platform.
To summarize, it's important to keep in your mind that your algorithm will only follow the given strategy and execute trade on your behalf without knowhow of current market hence human intervention is still needed.
Why can I gain after using algorithmic trading?
Algorithmic trading allows you to automate your trading strategy. It enables your trade to execute executed faster and at profitable price.
Is it important to build algorithmic trading models on technical analysis?
It's not mandatory to build the algorithm on technical analysis. A majority of the algorithmic trading models are developed on one or another technical levels. However, you can work on a fundamental investing strategy and further build an algorithmic model according to your needs.
What is the methodology of technical analysis?
Technical analysis is liable of predicting security's future price action based on previous price movements. It works around three basic principles. The first principle states that the current stock prices reflect all the information. Second, security prices move in a certain trend. Lastly, they information is repeated.
Is a disconnection between fundamental analysis and technical analysis possible?
There may exist a disconnect between your assessment of a security based on technical and fundamental analysis. In general, technical analysis would give a buy signal if the stock is moving up and notifies a sell signal if the stock is going down.
How to understand a flash crash?
A sudden decrease in asset price is referred to as a flash crash. An algorithmic trading is responsible for amplifying a crash. A sudden decrease in stock prices can trigger automated sell orders.
Shall I use algorithmic trading only in the stock market?
The algorithmic trading can be used in any security that trades. Stock market, forex trades, bonds, cryptocurrency trading are some of the platforms where you can choose an automated trading strategy.