Algorithmic trading strategies use technology to execute trades. Every system out there works differently, but the idea is always the same: to improve the profit odds, by spreading out orders and/or waiting for the best trading conditions so you can execute the trade.
There are numerous algorithmic trading strategies, and the more you know about them, the easier it is to make profitable decisions. Some rely exclusively on mechanical interventions, while others require some human involvement at various parts of the process. Major market makers and investment firms have more noteworthy technology, so every advantage helps.
This strategy looks for the market trend of moving in one direction based on high volume. The trading system here can either be simple or tricky. One simple momentum trading strategy is to invest in the five best performing shares on an index, based on a year’s performance.
This is one of the most used and popular algorithmic trading strategies. It uses an algorithm to find unique patterns to execute trades. When the stock breaks resistance, then you have to have completed an order to buy, or if it cracks resistance, that security is short sold.
This occurs when the value of securities is different in diverse markets. It is comprised of a set of quantitatively driven investment strategies, which aim to exploit the comparative price movement across multiple financial instruments by analyzing both the price difference and the price patterns. This strategy is often used by investors to generate higher profits.
After stock prices undergo sudden jumps in price, stock traders tend to assume that the stock prices will revert to being low again, much like an object falling back to earth after tossing and turning on the wind. Traders using this strategy purchase assets when they trade at the lower end of the trading range. When the assets approach a moving average, the investor opts to sell them.
With this strategy, the algo trading system looks at the conditions that occur around a specific price movement for a security, and then waits for the same same conditions to recur, with traders assuming that since something has happened at the same time for the last ten years, it is bound to occur during the 11th year as well.
Many traders believe that scalping is a bad thing, but it isn’t, and it generally results in significant profits. Scalping is entirely different from other trading strategies. It relies on the variance between the asking price and the bid of a security. It aims to create substantial impact on the market, where the trader creates a bid-ask spread. However, this is not a simple and straightforward strategy, and is most certainly not for the amateurs — plus it requires serious capital.
All of the above strategies are proven, and yet there is no inherent guarantee with any of them. Some algo trading strategies are more focused on creating long term returns, while the others are more focused on short term returns, and some are suitable for investors looking to optimize long term portfolio returns and eliminate risks.