Key Algorithmic Trading Strategies

Capital Markets CIO Outlook | Thursday, November 19, 2020

Let us look at some key algorithmic trading strategies

Fremont, CA: Algorithmic trading, popularly known as automated trading, utilizes a computer program that follows a determined set of instructions to place a trade. The trade can offer profits much faster compared to human’s speed. Any strategies for algo-trading involve an identified opportunity that is profitable in cost reduction or improved earnings.

Let us look at some algorithmic trading strategies:

Trend-Following Strategies

These also trading strategies follow trends in price level movements, moving averages, channel breakouts, and related technical indicators. These are the simplest and easiest strategies to implement through 

algorithmic trading since these strategies do not require making price forecasts or predictions. Trades are initiated on the basis of the occurrence of desirable trends, which can be easily implemented through algorithms without getting into the complexity of predictive analysis. Utilizing 50- and 200-day moving averages are a common trend-following strategy.

Mathematical Model-based Strategies

Proven mathematical models, such as the delta-neutral trading strategy, enable trading on a combination of the underlying security and options. (Delta neutral is a portfolio strategy comprised of multiple positions with offsetting negative and positive deltas—a ratio comparing the price change of an asset, generally marketable security, to the corresponding price change of its derivative—so that the general delta of the assets in question totals zero.)

Arbitrage Opportunities

Purchasing a dual-listed stock at a lower price in one market and selling it at a higher price in another market provides the price differences as arbitrage or risk-free profit. For stocks vs. futures instruments, the same operation can be replicated as price differentials exist every so often. Implementing an algorithm to find out such price differentials and placing the orders bring profitable opportunities.