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Algorithmic trading

What is algorithmic trading?

Algorithmic trading is an automated system of placing and managing orders for trading in various financial instruments with the help of computer programmes based on mathematical algorithms. Algorithmic trading is an automated system of placing and managing orders for trading in various financial instruments with the help of computer programmes based on mathematical algorithms. Algotrader or trader-quant only describes the algorithm of behaviour of the robot (mechanical trading system (MTS) in various situations in programming language.

Based on the analysis of the previous price series of financial instruments, they calculate the probability of the future price falling into one or another range. The robot enters or exits a transaction at certain changes in the price chart of the traded asset. A popular method of algorithmic trading is High Frequency Trading (HFT), i.e. electronic trading at a very high speed.

Algorithmic trading strategies

There are many algo-trading strategies that are laid down by programmers in a trading robot. The main ones are:

VWAP (Volume Weighted Average Price). Volume Weighted Average Price. Distributes volumes of orders evenly over a certain time interval at the price of the best bid or offer, but not exceeding the weighted average price for the specified period.

Percentage of Volume. Percentage of trading volume. Maintains a fixed percentage of market participation that is selected by the user. Trades frequent and small trades, responding well to volume spikes.

TWAP (Time Weighted Average Price). Time Weighted Average Price. Executes orders by evenly dividing them over equal time intervals. The strategy does not take into account predictable changes in trading volumes, which can negatively affect the market.

Arbitrage. The exchange robot, fixing the price discrepancy for the same or equivalent instruments on different trading floors, buys cheaply in one place and immediately sells more expensive in another, with the expectation that the prices for the instruments will converge and the positions will be closed with profit. Arbitrage is considered a virtually risk-free strategy, as the robot buys assets for a short period of time, avoiding sharp price fluctuations over time.

Trend following strategy. The tasks of the strategy are: early detection of the emerging trend through various indicators of technical analysis, issuing signals to trade in the direction of the trend and issuing signals to close a position when there are signs of the end of the trend.

Scalping. A strategy of short-term intraday speculative operations. High-frequency robots are most often used for scalping, which open and close positions in a fraction of a second when a small profit of a few pips is achieved. The strategy is mainly used on futures markets, where the commission from the turnover is much lower.

Pair trading. Strategy of short-term intraday speculative operations. For scalping, high-frequency robots are most often used, which open and close positions in a fraction of a second when a small profit of a few pips is achieved. The strategy is mainly used on futures markets, where the commission from the turnover is much lower.

Iceberg. The placed order for sale or purchase does not show the full size of the exchange order. Potential buyers see only a part of the order, and only after its execution the next part is published. And so on until its full execution.