'Looks can be deceiving,' a wise person once said. The phrase holds true for Algorithmic Trading Strategies. The term Algorithmic trading strategies might sound very fancy or too complicated. However, the concept is very simple to understand, once the basics are clear. In this article, I will be telling you about algorithmic trading strategies with some interesting examples. If you look at it from the outside, an algorithm is just a set of instructions or rules. These set of rules are then used on a stock exchange to automate the execution of orders without human intervention. This concept is called Algorithmic Trading.
Algorithmic trading relies on computer programs that execute algorithms to automate some, or all, elements of a trading strategy. Algorithms are a sequence of steps or rules to achieve a goal and can take many forms. In the case of machine learning (ML), algorithms pursue the objective of learning other algorithms, namely rules, to achieve a target based on data, such as minimizing a prediction error. In this article, we have a look at use cases of ML and how it is used in algorithmic trading strategies. These algorithms encode various activities of a portfolio manager who observes market transactions and analyzes relevant data to decide on placing buy or sell orders.
Artificial Intelligence is an ever-growing profession and also one of the most impactful divisions as it works at the crossroads of machine learning, cognitive intelligence, mathematics, and last but not the least, statistics. So, the most fundamental question we need to ask ourselves is what exactly is algorithmic trading. Algorithmic trading generally uses a computer program that follows a series of predefined directions to make a deal. In theory, the trade generates profits at a rate and frequency that a manual trader cannot complement since the algorithm makes trades using functions from advanced mathematics and does that round the clock, something which manual trader cannot compete with. AI trading systems are now set to usher in the second wave of innovation, the most momentous in the history of finance.
The stock market can be a voracious beast to those that don't understand it, but nowadays, you don't even need to understand it to make money. The rise of the digital information age and AI has brought about a new way of stock trading called algorithmic trading. Sometimes referred to as automated trading or black-box trading, this is essentially a program that can trade stocks at high speeds and frequencies, perfectly in line with the market. These programs are given constraints and instructions like timing, price, amount, etc. and a user can fine-tune how they exactly work. So how does this all work then...? Let's take a look.