Your guide to mastering algorithmic trading

What is algorithmic trading?

Algorithmic (algo) trading, sometimes called automated trading, is an approach that uses computer programs to execute trades at speeds and frequencies beyond human capability. These programs follow a defined set of rules and instructions (algorithms), which can be based on timing, price, volume, or a combination of these factors.

What are algorithmic trading strategies?

Algo trading strategies enable an automated – and therefore systematic – approach to financial market trading using powerful computer algorithms. These strategies aim to optimise trading decisions by quickly analysing vast amounts of data and executing trades automatically when predefined criteria are met.

Algo strategies can be tailored to specific objectives, such as reacting to market inefficiencies, managing risk, or improving trade execution. They often seek to achieve more consistent and disciplined trading practices by removing human emotion and bias from trading decisions.

Top 5 algorithmic trading strategies

1. Trend following
   This strategy helps identify and follow market trends by analysing historical data to forecast potential future price movements. You would assume that a market will continue moving in the same direction (i.e., follow the same trend) and align your positions accordingly.

2. Arbitrage
   Arbitrage involves identifying and acting on price differences for the same asset across different markets. This strategy aims to generate returns by simultaneously buying and selling an asset at different prices, often requiring sophisticated algorithms for swift execution.

3. Mean reversion
   This strategy is based on the idea that asset prices tend to gravitate towards a long-term average. You would select an asset and look for instances where its price deviates significantly from its historical average, expecting the price to return to its average over time.

4. Index fund rebalancing
   Index funds periodically adjust their portfolios to align with their benchmark index. With index fund rebalancing, you attempt to anticipate these adjustments and position your trades accordingly, considering potential market movements due to large-scale buying or selling by index funds.

5. Market timing
   Market timing strategies focus on analysing indicators and models to determine optimal entry and exit points for trades. This approach aims to enhance returns by enabling informed decisions on trade timing based on market conditions, requiring a thorough understanding of market behaviour and adaptability.

Where can I trade with algorithms?

We provide access to algo trading with platforms like ProRealTime and MetaTrader 4 (MT4), as well as our own Application Programming Interfaces (APIs). We offer advanced technical analysis and charting tools to enhance your trading experience, whether you want to customise your own algorithms or use off-the-shelf solutions.

You can automate your spread betting and contract for difference (CFD) trading with these platforms. Log in or create an account to get started.

• ProRealTime

ProRealTime is a leading web-based charting package for creating your own trading algorithms. Its tools, including an optimisation suite and unique coding language, help you create, backtest, and refine algorithms to operate according to your exact specifications.

ProRealTime trading platform

• MetaTrader 4

MetaTrader 4 (MT4) is a trading platform with a large community of users who actively create and refine trading algorithms. These algorithms are available to you in the MT4 marketplace, which offers a wide range of off-the-shelf solutions. MT4 is also known for its indicators and add-ons, which can help you with chart analysis.

MetaTrader 4 trading platform

• Native APIs

APIs enable you to automate trades, integrate data, and create trading algorithms and apps using languages like Java, Excel (Visual Basic for Applications, VBA), and .NET. Creating algorithms via APIs is complex and recommended for those with programming experience.

IG's Native API

Benefits and risks of algorithmic trading

Benefits of algo trading:

• Increases execution speed of trades
• Improves trade execution by eliminating human error and emotion
• Allows backtesting of strategies with historical data
• Ensures consistent execution of trading rules
• Enables trading across multiple markets simultaneously
• Reduces transaction costs
• Facilitates trading across different time zones.

Risks of algo trading:

• Technology failures or glitches can cause losses
• Over-optimisation based on historical data may lead to poor performance
• Lack of human oversight can miss market nuances
• High setup costs may be prohibitive
• Vulnerable to hacking or cyber attacks
• Algorithms may struggle with unexpected market events.

Frequently asked questions

• What is the best strategy for algo trading?

There is no single ‘best’ strategy for algo trading. Effectiveness depends on market conditions, trading goals, risk tolerance, and available resources. The most suitable approach depends on your circumstances, technical capabilities, market understanding, and capital. Consider testing strategies thoroughly before using real capital.

• What is the success rate of algo trading?

The success rate of algo trading varies widely, depending on the sophistication of the algorithm and market conditions. Remember, all trading involves risk, and success is not guaranteed.

• How much money is required for algo trading?

The initial amount required varies significantly, depending on strategy complexity, costs, and markets. Consider software expenses, data feed subscriptions, hardware requirements, and broker or exchange capital needs. Assess your financial situation and requirements before starting.

• _{The algorithmic trading strategies discussed on this page have been categorised by us as the top five of their kind based on their historical significance, their widespread use and their versatility across market conditions. While popular, these strategies aren’t necessarily the ‘best’ for every trader or situation. Their effectiveness is generally gauged according to factors such as their implementation, the individual goals of those who use them and market dynamics. We encourage you to use the information on this page as a starting point for further research and to consider your own risk tolerance and trading objectives when evaluating any strategy.}