If you are not already a part of the trading community, you are missing out. Today, many third-party upcoming platforms are willing to train people for free to trade on their platform. The competition demonstrates that many people are currently involved in trading, so all of these companies are competing for people’s attention. Many people survive on day trading, position trading, scalping, and swing trading. However, you do not have to be a full-time trader all of the time. As a side hustle, you can learn the skill or hire someone else to do the trading for you. People now have a better way of conducting algorithmic trading due to technological advancements.
So, how well do you understand algorithmic trading? Continue reading to learn everything you need to know about this type of trading. We will assist you in understanding how it works by identifying its characteristics and the benefits it provides to organizations and individuals. We’ll also point out where you can find these bots, which will help you understand the various two types of bots. Finally, we will go over some of the drawbacks of algorithmic trading. But first, let us define algorithmic trading.
What Is Algorithmic Trading?
Long gone are the days where you have sleepless nights or spend hours staring at your screen trying to place trades and close orders. Algorithmic trading can now open and close trades on behalf of people. We also refer to algorithmic trading as “algo-trading,” “black box trading,” and “automated trading.”
Algorithmic trading is executing orders by using price, time, and volume variables to create programmed trading instructions. In short, algorithmic trading uses rules and processes based on algorithms to execute multiple trades.
A developer creates a code that can assess the market situation and place trades in simpler terms. The whole process saves people a lot of time.
How Does It Work?
The use of algorithms in business trading started in the 1970s when people introduced computerized trading systems in the American financial market. Over the years, technology has changed, and so has every financial market worldwide, keeping up with the trend. Today we have Artificial Intelligence, with which traders and financial gurus have teamed up with software engineers to create bots, algorithmic trading software, and bots that use deep machine learning. The traders and software developers train the bots or soft wares to place trades. Therefore, the software knows when to enter and exit the market.
An Example of a Moving Average Algorithmic Trading
Let’s give an instance of the 20-day moving average trading algorithm. What happens here is that the algorithms buy a stock or security at a lower price than the average market price over a given period. It will sell a stock or security when the current price is higher than the average market price over a given period.
Given that you are trading a currency like EUR/USD, the bot will buy if the current moving price is less than the 20-day moving average and sell if the current price is more than the 20-day moving average. The green on a graph represents buying, while the red represents selling.
Should I Buy or Build an Algorithmic Trading Software?
Are you a trader but have no coding skills? Or are you a beginner with little knowledge of trading? You can purchase a ready-made bot or software that will help you place quick trades and get the rewards as soon as possible. However, these automatic boats are pricier than making your software. You will spend more money than you could have invested in the trading account to give you a higher profit margin. The automatic software also has some loopholes that can lead to huge losses.
On the other hand, you can decide to build your algorithms, which involves using your strategies in trading. Generally, creating software enables people to customize it to their needs. However, making your algorithmic trading software will require you to have some skills in trading and developing. Therefore, it will cost you a lot of time and effort, and in the end, the bot can still have some loopholes because no individual is perfect. So, do you prefer to buy or make your bot?
Features of Algorithmic Trading
We have seen that algorithmic trading software can cause people financial loss regardless of whether they choose to make or buy the bot. Here are some of the characteristics that your algorithm should have, whether you are buying or creating:
Algorithms Should Have Market and Company Data
Algorithms have access to market data that enables them to place trades. Similarly, a company can customize the bot to store vital company information like earnings. Therefore, an algorithmic trader should access real-time market data feeds, and company data feeds.
The Bot Should Connect to Various Markets
People trade so many markets, including cryptocurrencies, company shares, fiat currencies, and NFTs, among other stocks. Therefore, your software should work with all of these markets. The software should also accept feeds in different formats like Multicast, TCPIP, or FIX. Lastly, your software should also work on a third-party platform that takes the information from various exchanges and gives it to all clients in similar and straightforward formats.
It Should Have a Low Latency
Creating computerized trading aims to make trading faster than any human could ever perform any function. Latency is the time delay that happens when the system moves data points from one application to another. You follow a procedure when placing a trade; some of it is seen, and some of it happens behind the computer. The average time it takes to place a trade is around 1.4 seconds. The latency time depends on whether you will create a good trade or miss out on placement. Therefore, you should select a bot or create one with the lowest latency period.
Ability to Customize and Configure Products
Whether you are buying or creating, your algorithm should have the option of configuring and customizing the product. For example, a person should feel comfortable switching from a 20-day moving average to a 50-day average.
The ability for People to Customize Using Programming Language
You should check whether the software allows you to write your custom programs within it when buying. Besides, if you have that option, you should select a programming language you know. In contrast, you should create software that you can easily customize.
Bots Should Have Back Testing Option On Historical Data
The software should analyze profits and other strategies that people have used in the past. Besides, it should also have historical data that it can use for backtesting.
The Bots Should Integrate with Any Trading Interface
The algorithm should be compatible with the various broker platforms that enable people to place trades or transact.
Plug and Play Integration
The algorithm should be scalable by having APIs that trading tools commonly use. The software should have an easy plug-and-play integration so a person can start using it immediately after being installed.
Platform Independent Programming
The software should rely on one platform. It would help if you bought or created software that uses an independent language that functions on all operating systems.
The Software Should Be Easy to Understand
When buying or creating software, ensure that anyone can understand the system, including navigation. You should avoid completing black box software. However, it would be best to buy or create a book with detailed instructions, documentation, and FAQs.
The Advantages of Algorithmic Trading
- The software creates orders accurately and instantly.
- The software uses historical and real-time data for backtesting to make accurate trades.
- The algorithm carries out trades at the best possible prices.
- Algorithms reduce the risk of manual errors when they make trades.
- Bots reduce transaction options.
- The bots reduce people’s mistakes because of high emotions since their money is involved.
- The software correctly times trades to avoid substantial price changes.
The Disadvantages of Algorithmic Trading
- An algorithm can miss out on trades because it is unfamiliar with the trade. That kind of trade is not listed in the set of instructions that you or the developer programmed.
- The speed of the order of execution without human intervention can lead to a flash crash.
- A person can lose the liquidity created when the bot rapidly buys and sells a security and disappears.
The algorithms can ultimately make trades on your behalf or give you indicators of where you can place the trade. Indicators will save you the time and effort you will need to study the graph by giving you the exact entry and exit point. They will also help you control the instant trades that automatic bots place. However, you will have to keep checking the bot for the indicators and place the trades independently. That takes more time than using an automatic bot.
Where to Find Algorithms
You can access many software programs on different platforms. However, some of them can be found on:
- Market: It’s like the apple store where you can access applications for the trading platform.
- CodeBase: It’s where you can access free source codes and indicators that experts have posted.
- Freelance: You can order the software from professional developers.
- MLS: You can create software or indicators using this programming language.
Be Notified Of New Trader Evaluation Promotions
Submit your email if you want to be notified of new trader evaluation promotions. I never spam nor sell anything. Usually 2-3 emails a month are sent with the latest deals.
Futures and forex trading contains substantial risk and is not for every investor. An investor could potentially lose all or more than the initial investment. Risk capital is money that can be lost without jeopardizing ones’ financial security or life style. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Past performance is not necessarily indicative of future results.
Hypothetical Performance Disclosure:
Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown; in fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk of actual trading. for example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all which can adversely affect trading results.
You can read more here: Risk Disclosure
The external links on my site and in my video descriptions to trader evaluation companies and software companies are primarily affiliate links. I earn a commission from these companies on any sale made from people visiting these links. That said, I only recommend companies and software I personally use and actually do recommend. Believe me, I turn down a lot of companies who approach me. You can read my full Affiliate Disclosure here.
The content provided is for informational purposes only. I do my best to keep the content current and accurate by updating it frequently. Sometimes the actual data, rules, requirements and other can differ from what’s stated on our website. CanadianFuturesTrader.ca is an independent website. You should always consult the rules, faqs, knowledge base and support of any of the websites and companies we link to or talk about on our site. The information on their site will always be what ultimately dictates the current rules of their program, software or other. While we are independent, we may be compensated for advertisements, sponsored products, or when you click on a link on our website. The contributors and authors are not registered or certified financial advisors. You should consult a financial professional before making any financial decisions.