The use of computer programs for making trading orders and even decisions in some cases is defined as algorithmic trading. The entry and exit price will be handled by the algorithm along with the order type and quantity. This means that no manual intervention will be required during algorithmic trading. The primary purpose of using this type of trading is to reduce the costs associated with transactions, enhancing liquidity and for the decision making process. Different strategies are used for building and expanding the algorithmic trading portfolio. Some of these are on the sell side such as investment banks whereas some are on the buy side like hedge funds.
Some of the popular strategies used for developing a strong algorithmic trading portfolio are highlighted here:
Discretionary Trading
This form of trading take place when an analyst or portfolio manager determines when a particular trading position should be entered or exited without making use of any specific rule or formula for handling the function of decision making. An algorithmic trading function will be used by a discretionary trader for entering and exiting a position in order to attain the best levels in terms of pricing or even an acceptable average price. For the futures and stock market, discretionary traders can utilize the algorithmic function called Volume Weighted Average Price (VWAP) as it’s highly effective.
High-Frequency Traders
A very high rate is maintained by these traders for moving in and out of the numerous financial markets. Their aim is to make quick profits by catching very small moves as soon as possible. It has been revealed through statistics that 2% of the total equity firms comprises of high-frequency trading companies, but in regard to the total equity volume, these traders make a 73% contribution.
Automated Trading
There are lots of investors out there that take advantage of automated trading for handling the entire investing process. All the decisions are made by the computer, which has been pre-programmed for handling the entry and exit positions as well as the stop loss levels when trading should be halted. Statistical analysis is used by some of these trading strategies for capturing any small changes that may occur in a market whereas others use fundamental and technical analysis for keeping an eye on the larger movements made in the market.
Market Making
The deals, investment bankers and bankers make up the sell side of Wall Street. These are the firms, which will quote a price for buy hedge funds, mutual firms and other side firms that may exist. When a market is made by a sell side firm, the hedging strategy is usually handled by them with the use of an algorithm. Basically, these algorithmic programs are those that place orders quickly in the financial markets for offsetting the price they have just quoted for a particular trade.
Those investors who are keen to build their algorithmic trading portfolio can use a combination of these strategies for trading successfully and earning a high return on investment.