Your guide to the top 5 algorithmic trading strategies*
Designed to remove human error and emotion from financial decisions, algorithmic (algo) trading can help automate certain market activities. Discover some of the top strategies and benefits and risks associated with this approach.
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 that a human trader can't achieve. These programs follow a defined set of rules and instructions (algorithms), which can be based on timing, price or volume, or a combination of these factors.
What are algorithmic trading strategies?
Algorithmic trading strategies are techniques that enable an automated – and therefore systematic – approach to financial market trading through the use of powerful computer algorithms. These strategies aim to optimise the trading decision-making process by using algorithms to quickly analyse vast amounts of data and then execute trades automatically when predefined criteria are met.
Algo strategies can be tailored to specific objectives, eg reacting to market inefficiencies, managing risk or improving trade execution. These strategies often seek to achieve more consistent and disciplined trading practices through the removal of human emotion and bias from trading decisions.
5 popular algorithmic trading strategies
Trend following
This strategy aims to help you identify and follow market trends by analysing historical data to forecast potential future price movements. Based on your analysis, you’d assume that a market is going to continue moving in the same direction (ie follow the same trend) as it is currently and would therefore seek to align your positions with that direction.
Arbitrage
Arbitrage involves identifying and acting on price differences for the same asset across different markets. This strategy attempts to help you generate returns by simultaneously buying and selling an asset at different prices. It would often require sophisticated algorithms for swift execution.
Mean reversion
This strategy is based on the concept that asset prices tend to gravitate towards a long-term average. You’d decide on an asset to trade and then look for instances where that asset’s price deviates significantly from its historical average with the expectation that the price will likely return to its average over time.
Index fund rebalancing
Index funds periodically adjust their portfolios to align with their benchmark index. With index fund rebalancing, you’d attempt to anticipate these adjustments and position your trades accordingly. The strategy would take into account aspects such as potential market movements due to large-scale buying or selling by index funds.
Market timing
Market timing strategies would focus on helping you analyse various indicators and models to determine optimal entry and exit points for trades. The aim of this approach is to enhance returns by enabling informed decisions around the timing of trades based on market conditions. It requires a thorough understanding of market behaviour and an ability to adapt to changes quickly.
Where can I trade with algorithms?
We enable you to trade with algorithms by providing built-in access – not only to cutting-edge third-party platforms like ProRealTime and MetaTrader 4 (MT4), but also to our very own APIs. We also offer advanced technical analysis and charting tools to enhance your algorithmic trading experience, whether you want to build and fully customise your own algorithms or use off-the-shelf solutions.
You can automate your spread betting and CFD trading with these platforms. Log in or create an account to get started.
ProRealTime
ProRealTime is a leading web-based charting package that you can use to create your own trading algorithms. Tools within ProRealTime – including the optimisation suite and unique coding language – can help you to create your own algorithms from scratch and then backtest and refine them as needed. This means your algorithms will operate according to your exact specifications while running on the ProRealTime platform.
MetaTrader 4
MetaTrader 4 (MT4) is a trading platform with a large community of users who are actively creating and refining 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.
Native APIs
An API enables you to automate trades, integrate data from various sources and create trading algorithms and apps from scratch using coding languages like Java, Excel (VBA), .NET – or any other programming language that supports HTTP. However, creating algorithms via APIs is only recommended for people with a background in programming and coding, because it’s the most complex of the algo options.
Benefits and risks of algorithmic trading
Benefits of algo trading:
Algorithmic trading generally increases the execution speed of trades
It helps improve trade execution by eliminating human error and emotional decision-making from the trading process
Strategies can be backtested using historical data
It facilitates the consistent execution of trading rules
Multiple markets can be traded at the same time
Transaction costs may be reduced
It enables trading capability across different time zones
Risks of algo trading:
Technology failures or glitches can lead to losses
Over-optimisation of strategies based on historical data, for example, may result in poor performance in current market conditions
Lack of human oversight could result in certain market nuances being missed
High setup costs may be prohibitive for some
Algorithms are vulnerable to hacking or cyber attacks
Unexpected market events may be difficult for algorithms to adapt to quickly
FAQs
What is the best strategy for algorithmic trading?
There's no single ‘best’ strategy for algorithmic trading, as effectiveness depends on various factors, including market conditions, your trading goals and risk tolerance, and the available resources. Different strategies could work in different scenarios.
The most suitable approach would depend on your specific circumstances, including your technical capabilities, understanding of the markets and available capital. Consider combining multiple strategies or adapting your approach based on current conditions. Whatever your preferred technique, be sure to test it thoroughly before attempting it with real capital.
What is the success rate of algo trading?
There’s no single success rate applicable to all algo trading. The success rate varies widely and depends on the sophistication of the algorithm and the markets in which it’s used. Remember, all trading involves risk and success is never guaranteed.
How much money is required for algo trading?
The initial amount required can vary significantly. It would depend on the complexity of the strategy, associated costs and the markets you're trading in. Factors to consider include software expenses, data feed subscriptions, hardware requirements and the minimum capital needed for your chosen broker or exchange.
Some strategies might be viable with a few thousand pounds, while others could require substantially more. It's crucial to carefully assess your financial situation and the specific requirements of your chosen algorithmic trading approach before getting started.
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* 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.
This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
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