What is Algorithmic trading and does it work?

algorithmic trading and does it work?

In the last crisis in the USA and in the collapse of the stock and forex market, many blamed algorithmic trading. They came to this conclusion, apparently for the reason that today no trader can do without a computer and technical analysis, which is done on a computer.

Charts of price quotations clearly show what is happening with specific securities and currency pairs: whether they grow, fall, or remain at the same level. Indicators show overbought/oversold, the rate of price change, price acceleration, the strength of bulls or bears, the volume to buy or sell, etc. These indicators make it easier for a trader to make a decision about a deal.

Many traders went even further, instead of analyzing the situation on the market every minute they began to use a set of commands that the computer regularly performs. And if there is a signal to buy or sell, then a computer, or rather a trading robot program, will submit an application, after which it will check whether it is executed or not … There are many different algorithms and many of them are quite profitable. Approximate statistics show that in the US, more than 80% of all orders in the market are made by trading robots. The robot will almost never miss a deal, never make a mistake in the calculations. This is a very good helper.

How much interest rate can show a robot?

From zero to 8000% and more. Much depends on the algorithm of the Forex Robot, its parameters and the nature of the market. If these factors correlate as much as possible, then the Robot’s profitability will be maximum.

How to start trading forex with the help of a Robot or Advisor

There are several options:

  • Develop your trading robot yourself and start trading
  • Order Trading Advisor or Robot
  • Buy a ready trade Advisor or Robot

Most importantly, in my opinion, the trading robot must have a test mode. The mode in which you can test the robot in real trading. Demo trades are a little different from the real ones, so we recommend testing it in the real market. In test mode, it is not necessary to submit these purchase orders. All transactions can be carried out, so to speak, “on paper”.

Only after you make sure that you have made the right choice, can you launch the Robot into real trading on the exchange?

It is important to understand that when ordering the development of a trading Robot, you will spend much more time and money since this will be an exclusive version created specifically for you.

When you buy a trading robot, you save your money and time.

Advantages of algorithmic trading

Low-frequency Robot – a small number of transactions, one or two per day or less. Consequently, savings on commission, but do not have to wait for a large yield. Since large movements in the market are rare (about 30% of the time and less).

Ultra High-Frequency Robot – the yield can be calculated in thousands of percent per annum. It is necessary to understand that the profitability and net profit of these Robots are not the same. Tens of thousands of transactions per day and server rental on the stock exchange, for ultra-fast access to trade information, reduce profits by 50% or more. The development and maintenance of such robots are very troublesome and costly.

High-Frequency Robot – several dozen deals per day. The commission is not high, the efficiency can be very good, the yield is comparable to the size of the net profit, it is easier to test and monitor transactions, it is easier to control the Robot. Development and support are easier, the cost is quite affordable.

algorithmic trading evolution
What is a Robot and how does it work

Initially, a trading strategy is determined, tested for history. An algorithm is being developed. Being tested. Then the trading program makes deals on the stock exchange independently.

So, as follows from the very definition of algorithmic trading, it is based on a certain algorithm. In general, this algorithm contains a set of perfectly clear and unambiguous rules for opening, tracking and closing a position. An also-trader knows in advance wherein a transaction should be entered, at what level to stop loss by stop-loss, if the position starts to bring profit – at what price level it will be closed by taking profit, etc. He knows this because of he himself at the stage of creating the algorithm provided for all possible scenarios and “prescribed” in the program code of his robot a reaction to these events. This is the key difference between algorithmic trading and intuitive or situational trading: the trader acts only on the basis of the rules laid down in his algorithm,

And now let’s talk about the advantages and disadvantages of algorithmic trading, after all, over time, many experienced speculators go there, completely throwing all their “manual” deals, and this already says a lot. I would highlight the following fundamental benefits:

systems approach;
autonomy;
certainty in future expectations.

so should i use an algo?

The advantage of a systematic approach is, first of all, in minimizing the psychological burden: if a trader is confident in his system and strictly follows its signals, he absolutely knows that sooner or later the system will show itself and earn good profits. While in the case of intuitive trading, a trader (especially a beginner) often experiences psychological failures: “Is it worth it to enter the position now?”, “What should I do if the position starts to cause a loss?”. The result of this, at best, can be a lost profit, and at worst, a state of “tilt” that is familiar to many and a huge unplanned loss on the account. A systematic approach gives the trader so much needed a sense of confidence that helps psychologically. In the end, experienced “system analysts” simply abstract away from the market and open positions, observing only the precise execution of the signals of their algorithm. Under the autonomy refers to the possibility of the work created by a human algorithm without the need for its (person) presence. This is done both with the help of various already existing “gadgets” for automated trading, which a great many have recently divorced and with the help of self-written programs.

A person, as a result, performs only the functions of an operator, launching a robot at the start of trading (although this function can be easily automated). What ultimately frees up a lot of time for other things: from hired worker to the upbringing of children. Those traders who have tried to trade with the help of robots at least once will hardly ever give up on it: it is impossible to convey feelings when you, for example, returning home after outdoor recreation on a hot summer day, find yourself on a double-digit yield on your account.

The third and perhaps most important advantage is certainty in future expectations. It directly follows from the possibility of testing the algorithm on historical data. Historical testing is the process of “running” a fully formalized strategy on the historical values ​​of the price of a selected financial instrument in order to determine whether this algorithm is suitable for trading at all. As a rule, good and stable algorithms that show stable positive results on history will continue to generate profit with a high probability. If the results on the history of “reeling” then a plus, then a minus — it is unlikely that such an algorithm will show good dynamics in the future. With the help of historical testing, you can find out a lot of useful parameters about your system: the average yield by year/month/ week,

Knowledge of these parameters will allow determining in time the system when it “breaks down”: for example, if the maximum drawdown in combat conditions exceeds its historical equivalent or if the percentage of profitable transactions during the reporting period drops sharply in relation to the historical one, this is a reason to think about rejection of the system. And about the fact that any algorithmic system has its own lifespan (as, indeed, any business), I think you should not even say.

Round-the-clock work

Obviously, the trader can not constantly trade. No matter how hardy a person is, he needs at least 8 hours for healthy sleep and rest. And if you add work, household chores, communication with family, etc., it turns out that there is very little time left for trading. But after all, Forex constantly has favorable situations for making profitable trades, and most traders simply miss them. But the trading robot works 24 hours a day. He has no other business and he does not need to take a break, so even if at 3 am a good opportunity to open a good deal appears, the adviser will certainly take advantage of it.

No emotions

Any trader to one degree or another is dependent on emotions, which sometimes make it very difficult to trade. Fear, insecurity, or vice versa, self-confidence, excitement, greed – this is what prevents to achieve success in trade. Algotrading allows excluding the human factor because the automatic system acts exclusively according to the rules of the strategy on which it is based. In general, if there is the most disciplined trader in the world, then this is a trading advisor.

Wide opportunities

An ordinary trader is difficult to work with a variety of indicators and currency pairs, you have to choose 1-2 market assets and some of the most convenient technical analysis tools. Algorithmic trading greatly expands earning opportunities, since the robot can work with indicators and currency pairs in any quantity. The only caveat is that the advisor needs to set the correct settings and adjust his algorithmic trading strategies from time to time.

Do not need experience

Even those who still do not have sufficient knowledge in the field of trading can start earning with the help of advisers. After all, automatic systems do everything instead of a trader who does not have to delve into all the trade nuances.

Disadvantages

Out of the shortcomings, only one is immediately obvious — complexity. Moreover, the complexity is in everything: starting from the search and formalization of a working idea and ending with the study of programming skills that will definitely be needed in the process of trade automation. By the way, this is why “algorithmic trading” is recommended for mathematicians and programmers and is contraindicated for people far from these things. Time to study can take a lot of indecent, and a positive result, in the end, is not guaranteed.

Secondly, the robot can not rebuild. It works well in those periods when the market situation does not change, but once you do something unexpected, as the algorithm fails. When fundamental rather than technical factors come to the fore, the adviser continues to work in the same way, which is no longer effective under new market conditions. The adviser’s profitability decreases when unexpectedly good or bad economic data are published when political changes occur in the country, when natural disasters occur, which also affect the exchange rate, and so on. In these cases, a sharp human mind is much more preferable.

Lastly, finding a truly reliable trading robot is not so easy. According to statistics, out of the entire mass of offers on the Internet, only 10-15% are worthy, the rest is either non-working advisers or simply fraudulent schemes. Therefore, if you want to use a trading robot, then choose only those that are offered by reliable developers.

Conclusion

Well, in the end, if you nevertheless decide to seriously start creating your trading robot, we will try to identify the main stages of the transformation of an ordinary trader into an algorithmic trader.

1. You should start by studying a technical analysis program with a wide range of possibilities: Omega TS, WealthLab, TSLab, Metastock, Amibroker, or something similar. After that, you will have an idea about creating strategies, be able to independently (using a graphical editor or a program code) write your trading strategy, test it on historical data and learn many more useful things. These programs differ mainly in the programming language “embedded” there: from the simplest analog of the “pascal” Easy language in Omeg to the high-level language “C #” in later versions of WealthLab.

Actually, come up with the trading algorithm itself. In fact, this is the most difficult task, since the really worthwhile algorithm is a non-trivial product, which is far from being created by everyone. This is the future heart of your robot. It’s quite difficult to describe the process of creating an algorithm, it happens differently for everyone: someone is looking for ideas in the process of monitoring the transactions of other successful traders (the so-called “reverse engineering), someone focuses on monitoring the price, someone It is looking for “truth” in the testimony of various indicators.

Nevertheless, the common feature of all is the same – objection to observations, research, experiments. And if you do not stop, after many modifications, sooner or later you will have some semblance of a workable algorithm.

2. So, after you have programmed and tested your algorithm, and are satisfied with the results obtained on the history, it’s time to move on to its automation. Here you just need the knowledge of previously studied technical analysis programs, since it will be possible to build the simplest automatic execution of signals through them. For automation via Omega TS, Amibroker, Metastock and WealthLab, in addition to the standard Quik terminal, you will need a special bundle program (usually paid). The good news is that such a program is usually not very much and quite easy to use.

Of course, not all traders follow the described steps, many experienced programmers (and part-time traders) create their own programs and automate trading through them. Mathematicians like to use MathLab, which provides much more possibilities for calculations. However, for a novice trader, the steps described are one of the shortest and most reliable ways to get into algorithmic trading.

So is it worth it or not to use trading algorithms?

Obviously, with all the advantages of robots, you cannot fully rely on them, so experts do not recommend constantly trading in automatic mode. The best option is to combine manual and algorithmic trading and use robots as a hint and tool to diversify risks. Still, no mathematical model can completely replace a person, his mind, knowledge, and ability to quickly navigate in a volatile market environment.

To understand how this or that robot suits you, you need to test it, having previously been trained in algorithmic trading. The best way to do this is to launch a strategy tester if you are trading in MetaTrader. The tester allows you to drive the algorithm on historical quotes and understand what profit this robot would demonstrate if it were a real market. But keep in mind that even such a test is not quite enough since the algorithm can perfectly demonstrate itself on archived quotes, but be less effective in the present since the market picture could have changed in that time. In any case, it is better to control the work of the adviser yourself and to keep abreast of it in order to be successful in any situation.

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