Want to be an Algorithmic Trader?

Want to be an Algorithmic Trader?

23 May 2019

Quantitative trading consists of trading strategies based on quantitative analysis, which rely on mathematical computations and number-crunching to identify trading opportunities. Gaining knowledge of financial markets and quantitative methods is essential if you want to become an algorithmic trader Let us understand a few basics of Algorithmic trading from the following points-

  • Quantitative trading used by - As quantitative trading is generally used by financial institutions and hedge funds, the transactions are usually large and may involve the purchase and sale of hundreds of thousands of shares and other securities. However, quantitative trading is becoming more commonly used by individual investors.
  • Quant trading - Quantitative trading consists of trading strategies based on quantitative analysis, which rely on mathematical computations and number-crunching to identify trading opportunities.
  • Quant Research - Quantitative research is the process of collecting numerical data of a particular stock, industry or economy through standardized techniques, and then applying statistical methods to derive insights from it. Researchers generally use quantitative research when they want to achieve the stated objectives.
  • Quant Analyst - Quantitative skills refer to the ability to handle and interpret large amounts of data. A quantitative analyst working in the financial markets uses various logical and statistical analysis tools to model data and seeks patterns in the underlying factors. He uses them to arrive at a decision. Some level of proficiency in handling and interpreting data will go a long way towards making you a successful algo trader.
  • Coding Skills - If you learn coding skills, you will be able to develop a software program that will both generate and execute your buy and sell signals. Once you have developed a winning quantitative strategy, all that remains is to code it. Many traders think of coding as an optional skill since a large variety of over-the-counter algorithmic trading programmers are available in the market. However, learning to code gives the trader many basic advantages.
  • Customised trade - Depending on the trader's research and preferences, quantitative trading algorithms can be customized to evaluate different parameters related to a stock. Consider the case of a trader who believes in momentum investing. Price and volume are two of the more common data inputs used in quantitative analysis as the main inputs to mathematical models.
  • Programming trade - Traders can choose to write a simple program that picks out the winners during an upward momentum in the markets. During the next market upturn, the program will buy those stocks. This is a fairly simple example of quantitative trading. Typically an assortment of parameters, from technical analysis to value stocks to fundamental analysis, are used to pick out a complex mix of stocks designed to maximize profits. These parameters are programmed into a trading system to take advantage of market movements.
  • Back testing your strategy - Once you have created your own strategy, you will need to test it. You need a back-testing platform to test whether the trading strategy you intend to deploy is a winner. If the algorithm can take the historical data provided by the back-testing platform and generate good returns from it, then it might be a good strategy. However, you should be careful not to over-fit the algorithm to match the data, as it could affect its proficiency once it is applied in live trading.
  • Live trading - After back-testing, you can move to the last step, which is live trading. Currently, there are several brokers who provide a platform on which you can set up your algorithmic strategies and start trading. You can begin algo trading even with a modest sum. It is only if you are into high-frequency trading that you need a considerable amount of capital. The rise of technology and data sciences is changing the way various industries work. In the years to come, they are going to play a big role in the financial markets as well. If you can master quantitative and algorithmic trading now, you will surf the coming waves easily, instead of being hit by changes that you are unable to fathom or deal with.

Successful trading - Key points that can help a person to trade successfully in the stock markets are-

  • 1. Quality research
  • 2. Risk management
  • 3. Good technology & robust infrastructure.

Knowledge of financial markets - To become a sucessful algorithmic successful trader, you need three things:- knowledge of financial markets, quantitative skills, and coding skills. An algo trader’s knowledge of financial markets could be as basic as knowing a company’s past earnings, or could extend to something as complicated as analyzing a company’s financial statements.

Competitive advantages - A person planning to start a new business tries to figure out the critical factors that will contribute to its success. In other words, he focuses on the competitive advantages, if any, that he has over others. For a person who wants to trade successfully in the stock markets, the key competitive advantages can be profitable trading strategies, good technology and infrastructure, quality research and risk management, among others.

Where to learn more - If you are still apprehensive about becoming an algorithmic trader, there are stock market simulators available on the internet that let you practice your trading strategies  in the live market. You can practice for a while to make sure your strategy works and then start live trading with greater confidence.

The invention of quantitative trading helped traders generate trading signals and place orders in an automated way. Firstly, you should learn the basic concepts such as option spreads, order-to-trade ratio and price to earnings (P/E) ratio. Then train yourself for the more advanced concepts that you can incorporate into your trading strategies. The ability to handle and interpret large amounts of data is termed as ‘Quantitative Skills’. You can use various statistical and logical tools to analyze data and search the patterns in underlying factors. Always arrive at a decision by handling and interpreting data in a proficient manner. It will be great if you learn coding skills and this will help you to develop a software program for managing the trading signals. You will have to test the strategy once you create it on your own. Be sure about the working of your strategy and then start live trading with confidence. Also, you should be aware of the fact that there will be a sizeable impact of technological advancements on the financial markets.

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