Trading in this modern era is basically of two types: one which is done by humans and the other that is executed by computers. The one done by computers is called Algorithm trading, which involves computers using pre-defined instructions to implement trading. There is a basic notion behind the formation of this type of trading which was the advantages of speed, accuracy, and data processing conveniences that computers have over humans. Algorithm trading makes trading more organized and provides more liquidity by averting human emotions from trading activities. Due to liquidity in the market, in 2016 the Forex market was so overwhelmed with this process that 80% of marketers were using algorithm trading. Computers may work with speed and more accurately, but they cannot make decisions, so humans set instructions for them through different strategies.
The following are some best, well-used, and easy learning strategies.
Momentum and trends are one of the simplest and best strategies, a strategy in which the momentum and the specific direction of a price are observed and then trades are executed accordingly. In this strategy the trader assumes that the stock will continue to be in the same direction, this assumption is the basis of this strategy. The assumption is the main factor in which traders determine the take-profit or stop-loss for a provided stock. One of the illustrious methods of this strategy is the “simple moving average crossover”. In this method, a trader buys a stock when its long-period moving average value gets surpassed by its short-period moving average value.
The next best strategy is considered to be Arbitrage trading, in which a net profit is gained through differences in prices across different exchanges. Through this strategy, you can take advantage of inefficiencies and carelessness in the market, which can occur as the price of assets oscillates over time. A net profit can be gained by buying and selling assets if there is a difference between the prices across the exchanges or even potentially within the same exchange. The appliance of the method for Arbitrage Trading depends on the opportunity in the hand, and how to react to a particular opportunity at a specific time. There should be an opportunity for investment, you can claim this opportunity by identifying the overlap of the highest bid price and lowest ask price. Arbitrage trading depends on the trading opportunity, that is why there are two types of arbitrage trading such as Simple Arbitrage, and Triangular Arbitrage.
Mean Revision is the next well-applied strategy in algorithm trading, it depends on a concept, extreme events will be followed by normal events. According to this method, the price of an asset will return to its average value, regardless of its fluctuation. This strategy deals with only one asset on one exchange or different exchange centers. They both look at the future of a single asset and its time series and predict its return. To apply this strategy, there is a dire need for an indicator, which is a calculator such as RSI, Relative Strength Index, which calculates the change in price and speed by using a scale of 1 to 100.
The next best strategy on this list is Statistical Arbitrage, which is one of the major types of Arbitrage Trading. This strategy follows a theory, when there is some kind of relation between two stocks, then there will be similarities between their reactions to an event or news. To apply this strategy is to analyze the price difference between the values of assets across the exchanges by looking through price patterns. There are various concepts used by this strategy such as time series analysis, pattern finding techniques, volatility modeling and co-integration. This strategy is one of those who have a history of being the most useful and profitable strategies.
The next best strategy is based on measuring the average trading price related to the volume of assets on different exchange centers called a weighted average price. Within this strategy there is one eminent method called the volume-weighted strategy. This method involves making smaller pieces of orders by breaking up the larger piece of order using the history of the volume of the stock. The basic notion behind this method is to have more buys and sells depending on price variations of the stock. There is one thing in common with the discussed strategies, and that is the opportunities at hand. If a trader has this opportunity, and he knows how and when to react, he can make any strategy best for himself.