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Getting Started with Algorithmic Trading Strategies

September 29, 2020 14:20 UTC
Reading time: 10 minutes

Algorithmic trading strategies have taken institutional trading desks by storm over the past decade. Now retail traders are also adding to the boom in using machine-based trading robots. In this article, we will go through an introduction to algorithmic trading strategies, the different types there are and how you could get started with an automated trading system from a free virtual trading account - a great way to practically learn what it's all about! Let's get started.

Algorithmic trading strategies

What are algorithmic trading strategies?

Algorithmic trading and quantitative strategies are essentially 'black-box' trading systems in which the execution of trades are done automatically through pre-programmed instructions. These instructions are developed by the trader or programmer and written in lines of computer code and may detail what conditions need to be satisfied and what parameters need to be met to buy or sell.

But is algo trading profitable and what percentage of the market is algorithmic trading based? According to investment bank JP Morgan, only about ten per cent of equity trades in the United States are done by traditional investors. This means that around 90% of all US equity trades are done by machines. Figures also suggest that from all the various different types of algo strategies out there, they are managing more than $1.5 trillion.

Many veteran investors and hedge fund managers have already said that the game has changed, largely thanks to the volatility and randomness created by high-frequency algorithmic trading strategies which takes trades in nano-seconds, beating any type of human trader. A common question among retail traders is 'how do I start algorithmic trading?'. Before we go through that it's important to actually know some of the algorithmic trading strategies used by quant traders.

The different types of algo strategies

There are many different types of algo, or quant strategies deployed into the financial markets at any one point in time. More and more are being built every day as new patterns emerge in the market. Investment banks and hedge funds spend millions and have dedicated floors to capitalise on this type of trading.

Below are just a few of the different types of algo strategies used by quant traders. Some will be out of reach for everyday retail traders but it's important to know the different types out there as technology is always advancing. Let's have a look at a few of the most common and best algorithmic trading strategies used by institutions before we look at how retail traders can actually get started with algo trading using the globally-recognised MetaTrader 5 trading platform.

Did you know that you can download the MetaTrader 4 trading platform provided by Admiral Markets completely FREE? This platform allows users to trade directly from the chart using manual orders, as well as through Expert Advisors (EAs) which are automated trading systems. Better yet there is the MetaTrader Market where you can find other algorithmic trading strategies to use - a topic discussed further down. Start your FREE download now by clicking the banner below:

Trade Algorithmic Trading Strategies With MetaTrader 4

1. Mean reversion strategies

A mean reversion trading strategy is a strategy which identifies markets that have gone too far in one direction and are ready to back to its average price. Many retail traders actually use something like this when trading with Bollinger bands - a very popular mean reversion technical trading indicator.

While some quant traders would also use such tools, the parameters and conditions to identify a market that is about to revert back to its mean are likely to be extensive. Not only will there be an analysis of technical tools but likely cross-asset correlation probabilities, volatility and sentiment analysis and more.

2. Stock market index rebalancing

Stock market index funds need to be 'rebalanced' every so often to allow for new underlying prices and changes in market capitalization of the individual stocks they track. This rebalancing of buying and selling to adjust the overall fund creates unique opportunities for algorithmic traders who can front run and exploit the trades that are set to take place to rebalance the fund.

Of course, this type of strategy is solely for the domain of high-frequency traders who can identify such conditions using quantitative modelling methods but then exploit any potential moves within nanoseconds and with decent capital size and risk management processes in place.

3. Arbitrage trading strategies

Arbitrage trading is the process of finding opportunities in the price differential between two similar markets. These types of situations can arise when the same market is traded from different places. For example, the price of cryptocurrencies can vary greatly across different cryptocurrency exchanges. It can also happen on markets which are traded on the futures market and on the cash market and is one reason futures algorithmic trading strategies are common.

Arbitrage trading strategies is probably the most common type of high-frequency trading strategy. But, of course, it is really only for those who can take multiple trades within nanoseconds but most importantly have the right tools and resources to even recognise a price differential between two markets.

While many retail traders will often try to find bitcoin algorithmic trading strategies it really is more for institutional traders. This is because the contract size to trade on the futures market is quite, meaning individuals need a very large trading account. Leverage restrictions also hamper retail traders from cryptocurrency automated strategies.

4. Trend following strategies

Trend following momentum-based trading strategies are very common among long-term institutional traders, as well as retail traders starting out with automated trading using Forex algorithmic trading strategies.

The idea of a trend following system is to identify a momentum-based market that could turn into a longer-term trend. Of course, the term 'long-term' is relative. Intraday algorithmic trading strategies may class long-term as just a few hours. A longer-term quant trader may class long-term as several weeks or months. The fact there are so many different types of traders doing different things is one reason the market will always go up and down over time!

Algorithmic Trading Strategies example trend following MT4

A screenshot of the MetaTrader 5 trading platform provided by Admiral Markets showing the 20-period, 50-period and 100-period exponential moving average and the MACD indicator.

Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (Contracts for Difference, Exchange Traded Funds, Shares). Past performance is not an indication of future performance.

The above chart is typical of a trend follower. Technical trading indicators such as moving averages help traders to identify strong trending conditions and oscillators can help identify the beginning or end of a move. While traditional traders would create rules on when to buy or sell and where, quant traders would simply write lines of codes to automatically identify the conditions to buy or sell and then to actually execute those orders.

Of course, finding winning algorithmic trading strategies does involve a lot of trial and error. Some markets may perform better than others depending on which type of quant strategy you try to emulate. Fortunately, Admiral Markets also provides access to the upgraded version of MetaTrader 4 called MetaTrader 5.

The MetaTrader 5 trading platform allows users to trade on multiple asset classes while accessing advanced trading tools. This means you could potentially trade an automated trading strategy using Expert Advisors across a wide variety of different asset classes such as CFDs on stocks, commodities, Forex, indices and more! Download the platform for FREE by clicking on the banner below:

Trade Algorithmic Trading Strategies With MetaTrader 5

Now you know a little more about the different types of algorithmic strategies there are, how do you automate a trading strategy? Let's find out!

How to use an algorithmic trading system

There are three options for most people to start using an automated trading system.

  1. Learn how to code and build one yourself.
  2. Hire a programmer and work with them to build one.
  3. Find an already built system in the MetaTrader Market place.

Let's take a look at option three. To access the MetaTrader Market place, simply open your MetaTrader trading platform and open the Toolbox (MT5) or Terminal (MT4). This can be found in View from the menu at the top or by pressing Ctrl+T. Click on where it says Market and then on Experts in the tabs listed Main, Experts, Indicators, Libraries, Utilities, Favorites, Purchased.

Algorithmic Trading Strategies MetaTrader 5 Market

A screenshot of the MetaTrader 5 trading platform provided by Admiral Markets showing the Market place.

In the Experts tab, this lists all the different automated strategies that are available for purchase or for free. The systems are categorised by Trend, Scalping, Level Trading, Multicurrency and more. By clicking on any one of the Experts users can view statistics for it, buy it, rent it or download a demo. You can learn more about how to do this in the 'Ultimate Guide to Algorithmic Trading' article.

Due diligence is absolutely essential when using any type of automated trading system. There are thousands to look at and not all of them will be good. Strict risk management principles are essential. In fact, it would be wise to trade on a demo trading account first for at least several months to see how a system performs through changing market conditions.

Did you know that you can open a demo trading account with Admiral Markets for FREE? It's a great way to test out the automated trading strategies in the MetaTrader Market place to find the right one for you and to learn how it all works.

Simply click on the banner below to get started today!

Trade Algorithmic Trading Strategies With A FREE Demo Trading Account

About Admiral Markets

Admiral Markets is a multi-award winning, globally regulated Forex and CFD broker, offering trading on over 8,000 financial instruments via the world's most popular trading platforms: MetaTrader 4 and MetaTrader 5. Start trading today!

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or recommendation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.