Key Algo Trading Strategies You Must be Aware of

Capital Markets CIO Outlook | Tuesday, October 13, 2020

TWAP strategy breaks a large order into trades of smaller orders. These slots are equally distributed between the start and the end times. The purpose is to reduce the impact and execute the larger order closer to the average price.

Fremont, CA: Algorithm trading or algo trading utilizes computer programming software that follows a pre-determined set of instructions to place the trade. The instructions can be based on different parameters, such as price, volume, time, or other mathematical models. Algo trading strategies offer opportunities to either reduce expenses or earn profits.

Let us look at some important algo trading strategies:

Trend-Following

The most common strategy follows trends in technical indicators, such as price level movements, moving averages, and channel breakouts. These do not need any predictions or price forecasts making. When desirable trends come, trades can be executed without needing complex predictive analysis.

Time-Weighted Average Price (TWAP)

This strategy breaks a large order into trades of smaller orders. These slots are equally distributed between the start and the end times. The purpose is to reduce the impact and execute the larger order closer to the average price. The most common utilization of the TWAP strategy is to distribute large orders during the trading day. Executing a large order as a single trade would increase its price.

Volume Percentage

The algo trading bot continuously sends partial orders until the entire order is executed. The partial orders’ release depends on a pre-defined participation ratio on the basis of the market volume. This strategy sends orders according to one’s defined market volume percentage, which decreases or increases as the participation ratio reaches the pre-set level.

Although algo trading may look highly profitable and simple to maintain as well as execute, there are some risks involved. One needs to keep in mind that other traders may also utilize similar algorithms, which may result in price fluctuations in micro-seconds. Hence, it is essential to choose reputed and reliable automated trading software to get the most benefits.

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