Algorithmic Trading: Everything You Need to Know
If you are getting started in this trading, it is very likely that you do not know much about algorithmic trading. There is a very confusing and distorted idea of all this and that is why I have decided to disembark on explaining the concept. You will see that it is not as complex as it seems and that in 2020; you can use algorithmic trading yourself.
What is algorithmic trading?
Algorithmic trading consists of trading through algorithms;
what is an algorithm? An algorithm is an ordered and finite set of operations
that allows the solution of a problem to be found. Ok, basically when you trade
manually, what you do is follow a trading plan or a buy or sell strategy like
“if X happens, I execute Y”. This can be developed into an algorithm
so that it runs automatically.
You may be thinking that then, if you have a perfectly
defined strategy (and you should have it) you can automate it so that it runs
automatically. That’s right, in the end algorithmic trading is trading through
processes and logic. And for this, algorithms are used, hence its name.
How algorithmic trading works
I have already mentioned that an algorithm is based on
processes and logic. Well, a process can be as simple as “Monday to
Friday, the alarm goes off at 8 in the morning to go to work” or it can be
much more sophisticated with concepts such as artificial intelligence and
machine learning.
There are algorithms for trading that can be simple and
others more complex. What will it depend on? What you want to automate. If what
you want to do is a simple action, the algorithm will be simple and if you want
to complicate it you can do it to unprecedented limits (I do not recommend it).
Why apply algorithmic trading?
Advantages;
Comfort? Fashion?
✔ Algorithmic trading allows you to back test strategies and evaluate their results. In this way, you eliminate what does not work and you keep the systems that are profitable. But it is also that it allows you a degree of fairly deep knowledge of what is happening in your operations such as: number of hours where your system usually enters and exits, maximum historical loss, expected performance … in short, a lot of variables that you should know as a trader.
✔ Precision. The human being is good is many things, but in
the precision of your operations you are not going to beat an automated system.
You will enter the market buying and selling when you have to, at the exact moment.
✔ Peace of mind. You minimize emotions and don’t mess it up.
You are sure that you are doing what you have to do.
✔ Freedom. We could define it as time, since you do not
have to be constantly in front of the screen to continue trading. But I think
that something broader is covered, such as freedom, since it takes time to
develop, test and test strategies, but you can define when you do it. You can
do it during the weekend without this affecting in any way the execution,
travel or go to the doctor without interfering anything in your business.
✔ Scalability. You can apply it to different accounts,
assets and time frames. Adjust the risk to a% of your capital and grow without
having a limitation in terms of only managing two accounts. You can also apply
different strategies at the same time on different assets and time frames.
Disadvantages
When you create automated systems and apply them, whether
you like it or not, you have a technological dependency. That the connectivity
or the broker you are using does not fail. Although there are tools to limit
all this, the risk is there and it is good to comment on it.
EAs (Expert Advisors) or Forex Robots
EAs or Expert Advisors are nothing more than automated
trading systems. They are very common because they are fairly traded on Forex.
They have this name because they refer to those that are created for
MetaTrader. They are nothing more than robots with entry and exit rules and a
logic (strategy) for trading.
When we talk about robots, do not see it as something
strange, they are simply called that because it replaces what a person can do.
But remember that it was created by a person and that it is only a few lines of
code so that a computer can understand and execute them.
Automatic Trading V/s Trading Manual
Do I need to do algorithmic trading to be profitable and
make money? The answer is no. Algorithmic trading is not the fool proof formula
for making money.
Algorithmic trading is a methodology for doing things well,
methodically and maintaining an objective and real approach to things. That
allows you to do things professionally and organize yourself in terms of time
and space. The direction in industry is this, but this does not mean that doing
discretionary trading cannot be profitable. It works what works, there is no
more. There is no one infallible way for everything.
Platforms for algorithmic trading
Is it possible to do algorithmic trading if I don’t know how
to program? A few years ago I would have told you flatly no. But today there
are platforms that allow the development and testing of trading systems without
developing or coding. You can use platform to create systems that already
export it to you in mt4 or mt5 to directly apply it in your broker. The market
changed a lot with automated trading in the last decade and banks, institutions
and companies have invested a lot of money here. That is why today there are
many platforms to develop algorithms and implement them in a very basic way.