Algo trading or Algorithm trading is the process by which computers are programmed to carry out trades based on predefined instructions called Algorithms. Due to its quick execution, the trade is fast, accurate, and without human errors. Trades are executed at the exact price specified and the volume set without any delays.
The trades are executed through a computer program; however, the trading strategies are set by traders. So, a trader will decide the price, volume, and time when the trade should take place. The laptop simply executes the trade once all the conditions are met. Going with a trader like KJ trading systems can assist you in developing the right trading strategies that can give you systematic and quick returns.
Here are our top five Algo trading strategies that work.
Momentum and Trend
The simplest of Algo strategies, it attempts to understand the price momentum in a particular direction and executes trades accordingly. The assumption is that the stock will continue to move in the same direction as it is currently trending. This helps traders ascertain the take-profit or stop-loss price for a given stock.
When price moves beyond recent highs, and even when it moves downward, it stays above the prior swing lows, then the stock is in an overall upward trajectory. The same strategy holds when the price moves below the recent lows. Analysts can use technicals such as when the 30-day moving average goes above the 180-day moving average, then it is a buy and when the 30-day moving average goes below the 180-day moving average, then it is a sell.
Arbitrage Trading
Usually, stocks are listed in more than one exchange. The prices on each of these exchanges may differ. Arbitrage trading takes advantage of these differences in price, of the same stock, on different exchanges. The Algo trading strategy will buy the stock on the low-price exchange and sell the stock on the high-price exchange. For a more convenient option, you can partner up with KJ Trading Systems, whospecialize in Algo trading strategies and helps you maximize your returns.
Mean Reversion
This strategy depends on the theory that regardless of the price fluctuations, the price of a given security will come back to the average value at some point. According to statistician Francis Galton, extreme events are usually followed by normal events, i.e., things will even out over time.
Traders will determine the upper and lower price limits of the stock and will buy when the price is below the lower limit and sell when the price is above the higher limit, expecting the prices to return to the average.
Prices can change swiftly though, especially in fast-moving markets, and this might be a good enough reason to research trade execution services.
Statistical Arbitrage
When stocks are related to each other, then they will react in a similar fashion to an event or news. The statistical arbitrage strategy uses the price inefficiencies that arise among related stocks based on news or events. Usually, these are very short term trades and Algo trading can help take advantage of the small window of opportunity.
Weighted Average Price
Another efficient Algo trading strategy, the weighted average method uses the weighted average price to release small orders at a predefined time slot. So, you could have multiple buys and sells depending on the price fluctuations of the stock. It is difficult to carry out these trades accurately and quickly; thus, Algo trading strategies come into play.
So, if you’re an active trader, we recommend that you use one of the above Algo trading strategies to enter and exit stocks with accuracy and efficiency. This will maximize the return on your capital.