Hello! I was also curious about this topic and went to do some research:
TL;DR
Many trades on financial markets today are executed by algorithmic trading. They involve executing large trade orders by using algorithms on computers.
For us retail investors, there are platforms to engage in algorithmic trading if we want to explore this frontier of finance or would like to learn something new! For anyone interested in both programming and finance, this combines both fields too.
What is Algorithmic Trading?
It is the process of using computers to run complex mathematical formulas or follow instructions to execute trades.
- Mathematical formulas are programmed by a human trader based on certain trading strategies.
- Instructions are based on timing, price or quantity.
In fact, algorithmic trading is not new! It has been around since the early 1980s and only started to gain traction in the 21st century.
Algorithmic trading is used in many forms of investment activities by market makers, speculators, and proprietary trading firms.
High-Frequency Trading (HFT)
A subset of algorithmic trading, HFT allows for traders to take advantage of price discrepancies across markets that may exist only for a split-second and make small profits on each trade.
HFT typically involve buying low and selling high to benefit from bid-ask spreads.
It allows thousands of trades to be placed per second, something that is impossible for human traders to achieve!
Algorithmic Trading Strategies
Some popular algorithmic trading strategies include:
- Trend-following strategy: Based on price, volume and spread.
- _Time-weighted average price strategy: _Splits a large order into smaller portions which will be executed at evenly divided time slots in a fixed time period.
- Volume-weighted average price strategy: Splits a large order into smaller portions will be executed according to market volume.
Advantages of Algorithmic Trading
There are several advantages associated with algorithmic trading:
Backtesting
Allows for traders to test their strategies against historical data to validate them, a core feature of algorithmic trading.
Trades are Timed Correctly & Executed at Best Possible Prices
With algorithms written beforehand, trades can be executed faster to improve order entry speed and at optimal prices.
Constant Refinement of Trading Strategies
Traders can review the performance of their strategies and optimise them going forward.
Unhindered by Human Emotions & Errors
Algorithmic trading executes trading strategies according to plan and does not hesitate or question the trade.
Liquidity & Market Efficiency
HFT creates high liquidity and significantly reduce bid-ask spreads which makes markets more efficient.
Disadvantages of Algorithmic Trading
Increased Market Volatility
A large volume of HFT activity is present in today’s markets. Algorithms can enter and exit positions in milliseconds, resulting in big market moves.
One example would be the 2010 Flash Crash. On 6 May 2010, the Dow Jones Industrial Average experienced its second largest intraday point drop, falling by almost 1,000 points (9%) in just 20 minutes before going up again. This was due to an order that triggered a massive sell-off.
High Cost of Entry
A large cost is associated with algorithm programming, building and frequently upgrading infrastructure and setting up fast speed trade execution platforms
Costly Glitches
In the event of an algorithm programming error, HFT would be hard to stop at once and may results in substantial losses.
The case of Knight Capital is an example. In 2012, they used a new algorithm that made faulty trades, costing them $440 million and pushing them close to bankruptcy. They were eventually acquired by Getco, another HFT company.
What Platforms can you do Algorithmic Trading?
One of the more established platforms is MetaTrader 4 (MT4). They feature the MetaQuotes Language 4 (MQL4) Integrated Development Environment that allows you to develop tradingobots and technical indicators. There is even a MQL4 community that offers a free source code liof simple solutions for those who do not want to code.
At the core is their specialized MQL4 programming language which is relatively simple and beginner-friendly. Their MT4 Strategy Tester also helps in backtesting and optimising trading robots before utilising them in real trading. You can sign up with IG or OANDA to use the MT4 platform.
For beginners, you can opt to open a demo account first without putting money in yet.
For higher level programmers, you can also look at MetaTrader 5 (MT5) that uses the C++ programming language. You can sign up with Phillip Futures to use the MT5 platform.
Interest Group
If you wanna meet a like-minded group of friends who are interested in algo-trading, you can join them here. They have regular meet-ups to discuss & learn from each other!
Closing Thoughts
Algorithmic trading has disrupted the finance industry and offered an edge to a handful of trading firms for the past decade. While algo-trading may offer reduced opportunities in the future with increasing regulations in mature markets, there is still potential for growth in emerging markets.
For many of us who would like to explore using algo-trading in retail investing, please do your homework by learning the programming language and try out a demo account first before using real money!
Hello! I was also curious about this topic and went to do some research:
TL;DR
Many trades on financial markets today are executed by algorithmic trading. They involve executing large trade orders by using algorithms on computers.
For us retail investors, there are platforms to engage in algorithmic trading if we want to explore this frontier of finance or would like to learn something new! For anyone interested in both programming and finance, this combines both fields too.
What is Algorithmic Trading?
It is the process of using computers to run complex mathematical formulas or follow instructions to execute trades.
In fact, algorithmic trading is not new! It has been around since the early 1980s and only started to gain traction in the 21st century.
Algorithmic trading is used in many forms of investment activities by market makers, speculators, and proprietary trading firms.
High-Frequency Trading (HFT)
A subset of algorithmic trading, HFT allows for traders to take advantage of price discrepancies across markets that may exist only for a split-second and make small profits on each trade.
HFT typically involve buying low and selling high to benefit from bid-ask spreads.
It allows thousands of trades to be placed per second, something that is impossible for human traders to achieve!
Algorithmic Trading Strategies
Some popular algorithmic trading strategies include:
Advantages of Algorithmic Trading
There are several advantages associated with algorithmic trading:
Backtesting
Allows for traders to test their strategies against historical data to validate them, a core feature of algorithmic trading.
Trades are Timed Correctly & Executed at Best Possible Prices
With algorithms written beforehand, trades can be executed faster to improve order entry speed and at optimal prices.
Constant Refinement of Trading Strategies
Traders can review the performance of their strategies and optimise them going forward.
Unhindered by Human Emotions & Errors
Algorithmic trading executes trading strategies according to plan and does not hesitate or question the trade.
Liquidity & Market Efficiency
HFT creates high liquidity and significantly reduce bid-ask spreads which makes markets more efficient.
Disadvantages of Algorithmic Trading
Increased Market Volatility
A large volume of HFT activity is present in today’s markets. Algorithms can enter and exit positions in milliseconds, resulting in big market moves.
One example would be the 2010 Flash Crash. On 6 May 2010, the Dow Jones Industrial Average experienced its second largest intraday point drop, falling by almost 1,000 points (9%) in just 20 minutes before going up again. This was due to an order that triggered a massive sell-off.
High Cost of Entry
A large cost is associated with algorithm programming, building and frequently upgrading infrastructure and setting up fast speed trade execution platforms
Costly Glitches
In the event of an algorithm programming error, HFT would be hard to stop at once and may results in substantial losses.
The case of Knight Capital is an example. In 2012, they used a new algorithm that made faulty trades, costing them $440 million and pushing them close to bankruptcy. They were eventually acquired by Getco, another HFT company.
What Platforms can you do Algorithmic Trading?
One of the more established platforms is MetaTrader 4 (MT4). They feature the MetaQuotes Language 4 (MQL4) Integrated Development Environment that allows you to develop tradingobots and technical indicators. There is even a MQL4 community that offers a free source code liof simple solutions for those who do not want to code.
At the core is their specialized MQL4 programming language which is relatively simple and beginner-friendly. Their MT4 Strategy Tester also helps in backtesting and optimising trading robots before utilising them in real trading. You can sign up with IG or OANDA to use the MT4 platform.
For beginners, you can opt to open a demo account first without putting money in yet.
For higher level programmers, you can also look at MetaTrader 5 (MT5) that uses the C++ programming language. You can sign up with Phillip Futures to use the MT5 platform.
Interest Group
If you wanna meet a like-minded group of friends who are interested in algo-trading, you can join them here. They have regular meet-ups to discuss & learn from each other!
Closing Thoughts
Algorithmic trading has disrupted the finance industry and offered an edge to a handful of trading firms for the past decade. While algo-trading may offer reduced opportunities in the future with increasing regulations in mature markets, there is still potential for growth in emerging markets.
For many of us who would like to explore using algo-trading in retail investing, please do your homework by learning the programming language and try out a demo account first before using real money!