Few Essential Tips on Algorithmic Trading

Posted by Satrijit Viraf on December 28th, 2016

There are a number of tips that you can adhere to when you are doing algorithmic trading. However, there are a few things that you need to keep in mind when you are implementing such strategies. No matter what strategy you implement you would need to identify an opportunity, which will help you earn profits by way of improving your earnings and bringing down the costs incurred in the process.

Strategies to follow trends

In most cases of algorithmic trading you need to follow the trends in terms of moving averages. This is the commonest strategy that people follow in such a context. You should also look at channel breakouts, price level movements, and the technical indicators related to the same. As far as algorithmic trading is concerned these are the simplest and most convenient plans to put into practice. The simple reason for that is the fact that in these cases you do not need to make any predictions or forecast a price as such. In these cases, trades are started on the basis of the extent to which trends, which are desirable, are occurring. In these cases, there is no need for you to get into complex prediction-based analyses.           

This is why these strategies are so easy to implement. As far as moving averages are concerned you can look at periods of 50 days and 200 days considering how popular these are.

Opportunities for arbitrage

When you a buy a stock that has been listed on two separate stock exchanges from one market and then sell it at the same time in another one you can regard the profit thus earned as arbitrage or profit that comes without any risk whatsoever. You can carry out the same operation in case of futures instruments versus shares. You need to understand the fact that from time to time you will get price differentials. You should use your algorithm in such a way that it is able to identify such cases of price differentials and then places the orders. This means that you get opportunities that are sure to earn you profits and that too in a manner that can be termed efficient.

Index fund rebalancing

As far as index funds are concerned, they have a defined period when they are rebalancing in order to bring their holdings at par with the benchmark indices that they are respectively supposed to reach. As an algorithmic trader this could be the opportunity that you may have been waiting for. You can earn some significant profits from this period. Here you can make the most of capitalized trades, which provide you 20 to 80 basis points. These points are provided on the basis of amount of stocks that are there in the concerned index fund. However, steps have to be taken before the index fund rebalances itself and restores parity. You can use algorithm-based trading practices in order to make sure that your trades are executed at the right time and you get the best prices.