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Algo Trading Strategies

Algo trading is the new era of trading that beats out manual trading effortlessly. As the name suggests, algo trading is based on smart algorithms and uses computing resources to generate high profits and for that you’ll need great strategies for algo trading.

Before diving into algo trading strategies, here are some points why you should switch to algo trading.

Advantages of Algo Trading

Here are some of the benefits of algorithmic trading:

  • Trades are executed at the best prices.
  • Trades take place in a fraction of a second.
  • It is highly accurate as algorithms work only according to their programming.
  • Lower transaction costs due to simultaneous trades at high speeds.
  • Algorithms work consistently without getting tired.
best strategies for algo trading

Best Algo Trading Strategies

Each algo trading strategy serves a different objective and an opportunity to earn higher profits depending upon your potential:

  • Trend Following Strategy.
  • Arbitrage Strategy.
  • Weighted Average Price Strategy.
  • Mean Reversion Strategy.

1. Trend Following Strategies for Algo Trading:

This one is the most common and simple algo trading strategies opted by millions of investors and traders. The basic rule of this strategy is that trades are executed simply by following the trends and momentum of the market. It is the easiest algo trading strategy because it does not require any price forecast. Each trade is executed based on desirable trends and conditions, which is way easier to implement than any other trade strategy without getting into the complexity of data analysis.

2. Arbitrage Algo Trading Strategy:

In this strategy, algorithms compare the prices over different stock exchanges and execute the trade by buying the stock at lower prices in one market and simultaneously selling it at a higher price in another market, generating risk-free profit. All this process happens in seconds without errors, which is impossible for a human.

3. Weighted Average Price Strategies For Algo Trading:

It is one of the most effective algo trading strategies among others. Small portions of a large volume holding are broken down and either released based on historical volume profiles of the asset or release the order to the market using an evenly divided set time between start and end time. This strategy aims to be safe from the volatile market by executing the order near the average price between the start and end times, thus minimizing the impact of the market.

4. Mean Reversion Algo Trading Strategy:

The mean reversion strategy works on only one principle: the low and high prices of a financial instrument are a temporary phenomenon, and they’ll eventually revert to their mean value in some time. Following this strategy, algorithms are designed to make the trade when the value of a financial instrument breaks in and out of its defined range.

The Bottom Line

Multiple algo trading strategies are available in the market, or you can get a customized one based on your objectives because it is the toughest part when choosing an algo trading strategy. The algorithms are fast, accurate, and disciplined, but achieving your goals will be impossible without selecting the right algo trading strategy and setting up the program.