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Algo Trading | July 21, 2020

Dealing with Market Volatility using Algo Strategies

Algorithm trading, where a computer automatically executes trades based on pre-programmed instructions, has gained popularity over the years. As it uses a computer program to do trading, algo trading can help you earn profits at a higher speed than humans, even along with stock market volatility.

Algo trading through an automated trading platform is now an enormous factor in the daily ups and downs of the stock market. But algorithmic trading doesn’t impact stock market volatility negatively.

Adopting algorithmic trading (or algo trading) is helping investors mitigate market friction and reduce volatility. This means that the key risk in today’s stock market - volatility can be handled if you trade through an automated trading platform.

Algo trading offers several benefits, such as

  • It enables investors like you to respond quickly to future markets. You can make the most of future market opportunities to generate good returns over your investment in stock trading.
  • With its innovative technology, algorithmic trading provides you with faster speed and greater accuracy in placing and exiting orders. You can easily program the automated platform to trade based on a set of pre-defined instructions.
  • Using automated trading platform for trading also allows you to eliminate or, at least, minimize human error. Algo trading uses a systematic approach for trading, which ensures that your stock trading decisions are not based on the emotional aspect of human behaviour. With a more disciplined and pre-defined trading approach, you can reduce errors and expect higher returns.
  • Algo trading also helps investors in price discovery and liquidity. Earlier, it focused only on the short-term, but now, it is also addressing volatility complexities and risks to help investors earn good returns.

But how is that possible? There can be a plethora of trading strategies as per your style, however, there are few top algo strategies used by the successful traders.

  1. Momentum and Trend based Strategy: Such models are based on the simple trading method of following the trend and momentum already exhibited in the market. The decision is based on the past movement of the share which decides whether the uptrend/downtrend will continue or not.
  2. Statistical Arbitrage Strategy: Arbitrage is simply an opportunity that exists when the prices are different on different stock exchanges. The algo helps in leveraging such events with its fast execution, which is not possible with human trade. Since the prices are not too dispersed, the main game lies in the volume of the trade.
  3. VWAP Strategies: This strategy uses stock-specific historical volume profiles to execute the orders as close to the Volume Weighted Average Price as possible. They convert the large order into small orders and dynamically trade in the market.
  4. Mean reversion: This strategy refers to the reversion of the stock prices back to its average or mean. The algo trading comes into play when the prices are extreme and the trades are executed to capture the unexpected swings. The disadvantage of this strategy is when the prices do not come back to its mean in the expected time and keep on moving in one direction.
  5. TWAP Strategies: This strategy uses the evenly divided time slots between a start and end time of the market. They break up a large order and divide it into smaller parts to execute them dynamically. The objective is to reduce the market impact by executing the close to average price between start and end times.
  6. Mathematical Model-based: Many mathematics-based models have provided handsome returns in the past. One of the strategies is the delta neutral trading strategy which involves using options contract.

One of the biggest advantages of adopting algorithmic trading is that it allows you to keep human emotions aside and trade using a strict and disciplined approach. These two factors play an important role in helping you survive in uncertain and highly volatile markets. You can not only mitigate risks but also make good profits by trading through an automated algorithmic trading platform. However, ensure that you use the right algorithms and strategies to grow your wealth through smarter, automated stock trading.

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