What is algorithmic trading strategies - Best Automated Investment Strategies | Algonest

Algo trading strategies

Algo trading online in the most developed trading form globally. In this case, the whole process of trading is done with the help of computers set up with a certain range of instructions, called an algorithm. The machines execute your trade based on the set algorithm. It allows making the trading process really fast and accurate.

All the trades are executed only at the volume and price specified and the time necessary to process the trade is minimal. The main benefit of it is reducing losses caused by the lag of time between placing and executing an order.

Online algo trading is not affected by human emotions, which is another huge advantage of it. The computer has no fear, so its approach to trading is very practical.

However, even this type of trading requires applying certain algo trading investment strategies.

Best Automated Investment Strategies

Expert traders follow their own plan for investment strategies, so below, you will find best automated investment strategies to choose from.

Trend and Momentum based strategy

The best automated trading strategy is a relative concept, so you have to choose the one suitable for your needs, goals, and requirements.

This one is the most widely used and the easiest. It means that a trader just follows the momentum and the trends in the market. So, the trades are executed according to them. The buy/sell orders are generated automatically, while such technical indicators, like price level movements and moving averages, are studied.

Mean reversion strategy

It is based on the concept that the security prices might go high or low, but at some point of time, they go back to an average or mean value.

Thanks to this strategy, the upper and lower price limit of a stock is found, so the algorithm works to execute orders as the price goes beyond normal ranges. The average price is calculated by the algorithms according to historical data of the security. The algorithms execute the trade expecting that the prices get back to the average level. What does it mean? It means that if the prices are too high, they will decrease, and if they are too low, they will increase.

This strategy is very helpful when the market is really extreme and traders can benefit from such swings. For example, if the 30-days moving average is lower than the 90-days one, the price is assumed to be too low and to be back to the 90-days moving average. The algorithm gets the signal to buy the security.

Arbitrage strategy

When there is a price difference on different stock exchanges, arbitrage opportunities arise. This is one of the algo trading strategies, making use of the arbitrage opportunities through using computers to identify the opportunity the quickest possible and make use of it.

When the stock is listed at a lower price on one exchange and at a higher price on another one, the algorithm defines the price differential at once, and executes a trade to buy on the low-priced exchange and sell on the high-priced one, everything is easy.

Compared to human trading, these algorithmic trading strategies are really efficient thanks to their speed and accuracy. The price difference between various exchanges is not too high, so the volumes of the trades have to be kept really high in order to ensure some good profit. Such a strategy is perfect in terms of Forex trading.

Weighted average price strategy

Being one of the most efficient algorithmic trading strategies, it can depend on volume weighted average price or time-weighted average price. The orders in this strategy are large but released not at one go, but in small parts through using historical volume profiles of the stock or some particular time slots between a start and end time.

The main goal of such a strategy is to execute an order as close as possible to the volume weighted average price or the time-weighted one in order to decrease the market impact. It is usually humanly impossible to execute such orders, so the computers do it with special accuracy and efficiency.

You can see that there are lots of strategies to choose from when doing algo trading. The algorithm is placing the orders but the trader designs the algorithms and the strategies, on which the success of the trade depends.


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