How to get started with algo trading
Before you can use algorithmic trading, you first need a trading strategy. Therefore, you first need the technical and financial knowledge to identify a sound strategy for trading. Once you identify a trading strategy, you can use algo trading to implement that strategy through an automated process.
Now that you understand what algo trading is, let’s talk about how you can implement your knowledge and automate the trading process.
What do you need to start algorithmic trading?
Hardware & Software. Algo trading is computer-based, meaning, to benefit from this new technology, you need a PC or laptop, remote server hosting, cloud storage to back up data in case of emergency, a stable internet connection, and an extra power supply. You may also need special software (we’ll talk about this later).
Platform & Data. If your broker doesn’t provide a built-in trading platform, you will likely need to pay extra for one. The same goes for market data. Some brokers provide inadequate data, while others don’t even offer live or historical data. Because algo trading is heavily reliant on data and information, you will want to work with a good data provider.
Capital & Knowledge. As with other trading strategies, you need knowledge and trading capital. The size of your capital investment will vary depending on your financial situation, goals, and algo trading strategy. As for knowledge, the more financial and technical skills you have, the more prepared you will be for trading.
Algorithmic trading software
As you can guess from the name, you'll need an algorithm to start algo trading. In the trading community, these algorithms are called trading robots, or “bots” for short. There are three ways to get an algorithmic trading bot:
Create a trading bot from scratch
You can use APIs to establish your own automated trades, create algorithms, etc.
APIs allow secure and reliable trading as long as you understand how to set them up. The advantage is that you gain complete control over your bot and its functionality. However, this is only a good option for those with advanced technical knowledge. If you aren’t prepared to deal with the technical aspects of bots, creating a bot from scratch isn’t a good option.
Building an API from scratch requires at least a basic programming and coding background. Any programming language with HTTP support will fit your strategy well (Java, .NET, etc.)
Use a ready-made trading bot
For traders who don’t have a technical background, there are ready-made trading bots that anyone can use.
Software solutions like MetaTrader, Interactive Brokers, and AmiBroker are designed for traders without a technical background. Let's take MetaTrader4 as an example. It's a tried-and-true trading platform where you can find and use pre-made trading algorithms. On top of that, you get add-ons and indicators. Some of them are free, while others require a paid membership. MT4 can help you with chart analysis, strategic planning, and execution.
Ready-made bots are great because you can implement them almost instantly without any coding required. However, these bots do come at a price, and some of them can be quite expensive.
Use a trading bot marketplace
Instead of creating your own bot or paying a software provider for a ready-made bot, you can purchase bots on a trustworthy marketplace like 3Commas. Here, you can find well-rounded algo trading strategies that have already been tried and tested. Instead of worrying about APIs or the peculiarities of specific brokers, you can instead simply copy the strategies of veteran traders to make a profit. The platform offers a simple set of automated strategies to trade stock options, a 24/7 support team, and a free demo account. The demo account is completely free and allows you to test out trading strategies without using real funds.
Algo trading software compared
Here’s a quick comparison of the three options previously discussed:
APIs
Ready-to-use software
Trading bot marketplace
No limitations: you can adjust them however you like
User-friendly interface, support may help you
Compare different platforms and choose the best for you
More secure & reliable if built correctly
Easy to use and requires almost no effort to start
Balanced approach, great for beginners & intermediate traders
Require programming knowledge
Might be expensive. Some programs have a $200+ or even $300+ annual charge
Follow the strategies of seasoned traders right on the spot
Time-consuming as you have to troubleshoot yourself
Might lead to losses due to bugs and trading errors
Flexible budget so you don’t have to pay hundreds of dollars
Key features of algorithmic software
It's best to pay attention to these three technical criteria when choosing a trading bot:
Customization
Many platforms provide standard algorithms based on a 50-day moving average. As soon as the average crosses the 200-day point, the algorithm shows satisfying results, but some traders may benefit from experimenting. Switching to other strategies may improve both your knowledge and results. You might want to adjust the moving average parameters down to a 20-day moving average with a 100-day average. If the program doesn’t allow much customization, you may be confined to the standard features, causing a lack of flexibility.
Technical add-ons
Some software allows you to build your own add-ons and modules using Matlab, C++, Python, and other programming languages. If you’re looking for a flexible and experimental way to trade, consider software that allows you to add your own code into the main program.
Advanced backtesting features
Consider software that allows you to access historical data. Backtesting your strategy in this fashion is unrivaled. Implementing both practical and profit-based tactics on historical data has the most impact on your simulation. For backtesting, if a piece of software doesn't give end-of-day data, you might want to think twice about using it.
Once you decide on a platform/software, it’s time to pick your strategy.
Steps to start algorithmic trading
No trading bot, platform, or software can think, they can only execute a strategy based on a series of inputs by a trader. Therefore, you need a solid knowledge base to understand how to utilize algo trading effectively.
Preparation
Research and strategy modeling require a good understanding of the market. There are plenty of resources when it comes to trading strategies, here are a few of the most insightful:
Books & web materials:
- Building Winning Algorithmic Trading Systems — Kevin Davey reveals his techniques for creating trading systems with triple-digit profits.
- Algorithmic Trading & DMA — Barry Johnson provides info about the modern market’s cornerstones: algo trading and direct market access.
- Inside the Black Box by Rishi K. Narang — A seasoned trading veteran shares the best algo trading practices.
- Quantpedia’s blog & algorithmic trading strategies — Algorithmic trading ideas and strategies along with tons of financial research.
- 3Commas Academy blog — Trending articles and thorough guides about algorithmic trading & crypto in general.
Videos & courses:
- Wall Street Warriors Season 1 to 3 — YouTube channels about finances & algo trading.
- Automated Trading System Development — Develop your own automated system via MatLab.
- If You Had Everything Computationally Where Would You Put it, Financially? — A YouTube lecture by Google TechTalks.
- Courses about algorithmic trading — Video lessons on Coursera designed for beginners and intermediate algorithmic traders.
You can also find practical information on Reddit and Quora. A good example is Max Dama’s automated trading PDF.
Once you’ve absorbed the requisite knowledge, it’s time to put that knowledge into practice.
