What Skills Do We Need For Algorithmic Trading?

In this post, we’ll take a look at:

5 Steps to Start Algorithmic Trading

 

Algorithmic Trading or Algo-Trading, is a new concept recently introduced in the financial markets that tries to make the trades—opening and closing positions—automatic. Of course it should be mistaken with AutoTrading, which a totally different concept, merely focusing on the automation of the trades.

It mostly refers to expert advisors (EAs) created by a programmer (MQL4/5, PineScript, Java, …); in which, the rules or the trading conditions are regulated by the trader. In other words, the trader spends hours watching the market, trying to find a trading strategy to turn it into codes. There’s no artificial intelligence.
But when it comes to algorithmic trading, the whole process should be performed, from the very beginning, by the computers, i.e. artificial intelligence – a kind of – or a software the utilizes AI.

In algotrading, the trading conditions (entry and exit rules, profit target, stop loss, trading limitations, etc.) will be obtained by the computer itself. It is a data mining process. The trader plays the role of data provider and supervisor. Computers do everything.
They use the prepared data and the instruments (technical analysis indicators, oscillators, etc.), and they build a variety of different trading systems (robots). Now, it’s time for the trader to select the desired ones, making a portfolio, and start [algorithmic] trading in a live account in the market.

However, there will be a question remained that what skills do we need for algorithmic trading? Read the following paragraphs to find your answer.

 

Step 1: Technical & Fundamental Analysis

Technical analysis won’t leave us! The very first step to start algotrading is to learn technical analysis. It may sound simple and primitive, but the fact is that Technical Analysis ‌is the foundation of almost everything in the financial market. Let us raise a question:
How you are going to work with different indicators in algorithmic trading when you are unfamiliar with them?

So, it is highly recommended to learn, or if you already know, please review from the beginning, the technical analysis. It should be remember that indicators (ATR or the Average True Range for instance) are nothing but a function of the market. However, we need them to evaluate the markets in terms of volatility, movement, etc.

It can be concluded that each indicator measures a specific aspect of the market; e.g. ATR looks after the volatility. Likewise, if you start studying about the indicators, or you may decide to review them, please find the application of each instrument in the market.

The second part of step one is fundamental analysis. Although many traders and fundamentalists may believe that fundamental analysis should be considered for long-term analysis, if you learn this field accurately and correctly, you will understand its applications in the short-term.

Every news has its impact on the market, whether it is long term or short term. Markets actually react to the effects of different news and it can be said that the market absorbs the news.

 

On-Chain Analysis

There is a mini-step here for Crypto-lovers. Although crypto still has a long way to go to become a great market for speculation, it can now be considered a trading market in the truest sense of the word.
Each market has its own features. So, in order to analyze a market, no matter it is algorithmic trading or not, you need the proper tool.

On-Chain analysis is a new tool for fundamental analysis of the cryptocurrency market, which has many applications. Of course, explaining this is beyond the scope of this article. But, to have a proper analysis of the cryptocurrency market, you must learn On-Chain analysis. It’s enjoyable!

 

Step 2: Trading Platforms

A warrior without a horse is NO warrior at all! Vividly, today, it is unlikely to call a broker and ask them to open or close a position on AAPL stock chart, for example. The trading platforms do everything a trader might need. They are the gate connecting you as the trader to the market. So, DO YOU REALLY EXPECT NOT TO KNOW ENOUGH ABOUT THEM?

Learning how to work with a trading platform like MetaTrader 4/5, TradeStation, TradingView, NinjaTrader, cTrader, etc. helps you run or backtest (as a double check) your trading strategies correctly. Algorithmic trading gives you trading strategies, high quality ones. but eventually you have to run the robots in a platform. How would you do that?

More important is the backtest. As a double-check, it is highly recommended to perform a backtest of your trading strategies in your trading platform. Of course, you need to learn how. A great sample is MT4. In MetaTrader 4, the default backtest precision is 90 percent; which is not as accurate as it should be.
A novice trader would never know that there are some ways to increase the backtest precision to 99 percent that is the most accurate among all the trading platforms. Nonetheless, how do you expect NOT to learn about the trading platforms?

 

Step 3: Brokers

There is no difference: manual trading, auto-trading, or algotrading. Brokers are NO friends! As an algo trader, you should keep in your mind that brokers will almost do anything to stop you from making profits.
Algorithmic trading helps you find high quality robust trading systems.

However, you should finally run the trading strategies on a trading platform in a broker; and there’s no more controlling or monitoring what is going on behind the scene. What would you do now?
The answer is “nothing”. There’s almost no way to stop brokers from interfering. The best thing you can do is to know them well.

 

Market Makers

No doubt market makers or DD (Dealing Desk) brokers are the worst. In fact, no matter you’re using the highest possible technology of algorithmic trading, your trades will almost never enter the market.

There’s always an aggregation of the trades happening behind the curtains, and they deceive you by NO SPREAD is taken, lowest commissions, fastest trades execution, and buzzwords alike.
Trading in a dealing-desk broker is true gambling.

 

STP (Straight Through Processing)

STPs are one level better than market makers, and they act as the middleman between your trading strategy and market, but still there are some scams like dark pools, stop loss manipulation, etc. you can trust STP brokers, and make them you second choice in the absence of ECNs.

 

ECN (Electronic Network Communication)

What is happening in an ECN broker is that you’re getting connected with market and there’s absolutely no interfering. The ECN broker takes only his commission, which is high, for connecting you to the market. It is strongly recommended to put ECN [brokers and accounts] as your first priority everywhere.

The groundwork, where you run your algotrading system is as important as the trading system itself. A low-quality broker may turn everything into loss, because as mentioned before, brokers are no friends for traders.

Step 4: Programming in Algorithmic Trading

Is programming required in algorithmic trading? This is the question everyone asks. The answer to this question cannot be NO for certain. But, for now, we can say NO, IT IS NOT REQUIRED.
Of course, if you already know programming, you are like ten steps ahead, and you can do many things with programming including adding special features to your expert advisors. But for the beginning, programming is not required at all.

In other words, it is recommended not to spend your time for programming first. Instead, try to learn other things, like technical and fundamental analysis, trading platforms, finding trading strategies, etc.
But how should we find trading strategies? This question is answered in the next step, step 5.

 

Step 5: AlgoTrading Software

When there is a will, there is a way. If you are not interested in programming for any reasons, no worries, there are software that can help you build different trading strategies without programming. It is in fact: algotrading without programming.
One of the best software that worth to mention is StrategyQuant X.
In StrategyQuant X, everything is at your service to build different trading system, scalping, speculating, day trading, and position trading.
You have access to the technical indicators, along with different money management methods, and the genetic evolution algorithm to build better trading strategies by combining the previous ones.
Robustness Tests, also, measure the quality of your strategies, and finally, the Walk-Forward Optimization informs you about the expiration of your trading robot.
StrategyQuant X Crash Course; Learn How to Build Robust Trading Strategies

 

What Programming Languages are Recommended for Algorithmic Trading?

If you insist on learning programming, you should know that for algotrading, Python is the best language. Knowing a programming language gives you a lot of maneuverabilityو so that you can customize all of your trading strategies according to your needs.
The other recommended languages are respectively MQL4 and 5 (for MetaTrader 4 and 5) and PineScript (for TradingView). There are other languages either like EasyLanguage, PowerLanguage, and Java that are not as practical as Python and MQL.

 

Conclusion

After reading this article, it is realized that algorithmic trading is not a rocket science. All in all, algotrading means the automation of the whole process of building, testing, optimizing, and running a trading strategy in a trading platform while the trader is no longer engaged in watch market, coding, etc. The only expected job is to monitor the performance of the portfolio of strategies.
Moreover, programming is not required and software like StrategyQuant X may come handy. There are 5 simple steps to learn algorithmic trading. Follow the aforesaid steps and enjoy the automation of your trades in the financial markets.

4.8/5 - (5 votes)
Facebook
Twitter
LinkedIn
Pinterest

Leave a Reply

Your email address will not be published. Required fields are marked *