Your guide to the top 5 algorithmic trading strategies

What is algorithmic trading?

Algorithmic (algo) trading, sometimes called automated trading, is an approach that uses computer programs to execute trades at speeds and frequencies that a human trader can't achieve. These programs follow a defined set of rules and instructions (algorithms), which can be based on timing, price or volume, or a combination of these factors.

What are algorithmic trading strategies?

Algorithmic trading strategies are techniques that enable an automated – and therefore systematic – approach to financial market trading through the use of powerful computer algorithms. These strategies aim to optimise the trading decision-making process by using algorithms to quickly analyse vast amounts of data and then execute trades automatically when predefined criteria are met.

Algo strategies can be tailored to specific objectives, eg reacting to market inefficiencies, managing risk or improving trade execution. These strategies often seek to achieve more consistent and disciplined trading practices through the removal of human emotion and bias from trading decisions.

5 popular algorithmic trading strategies^*

1. Trend following
2. Arbitrage
3. Mean reversion
4. Index fund rebalancing
5. Market timing

Trend following

This strategy aims to help you identify and follow market trends by analysing historical data to forecast potential future price movements. Based on your analysis, you’d assume that a market is going to continue moving in the same direction (ie follow the same trend) as it is currently and would therefore seek to align your positions with that direction.

Arbitrage

Arbitrage involves identifying and acting on price differences for the same asset across different markets. This strategy attempts to help you generate returns by simultaneously buying and selling an asset at different prices. It would often require sophisticated algorithms for swift execution.

Mean reversion

This strategy is based on the concept that asset prices tend to gravitate towards a long-term average. You’d decide on an asset to trade and then look for instances where that asset’s price deviates significantly from its historical average with the expectation that the price will likely return to its average over time.

Index fund rebalancing

Index funds periodically adjust their portfolios to align with their benchmark index. With index fund rebalancing, you’d attempt to anticipate these adjustments and position your trades accordingly. The strategy would take into account aspects such as potential market movements due to large-scale buying or selling by index funds.

Market timing

Market timing strategies would focus on helping you analyse various indicators and models to determine optimal entry and exit points for trades. The aim of this approach is to enhance returns by enabling informed decisions around the timing of trades based on market conditions. It requires a thorough understanding of market behaviour and an ability to adapt to changes quickly.

Where can I trade with algorithms?

We enable you to trade with algorithms by providing built-in access – not only to cutting-edge third-party platforms like ProRealTime and MetaTrader 4 (MT4), but also to our very own APIs. We also offer advanced technical analysis and charting tools to enhance your algorithmic trading experience, whether you want to build and fully customise your own algorithms or use off-the-shelf solutions.

You can automate your stock trading and CFD trading with these platforms. Log in or create an account to get started.

ProRealTime

ProRealTime is a leading web-based charting package that you can use to create your own trading algorithms. Tools within ProRealTime – including the optimisation suite and unique coding language – can help you to create your own algorithms from scratch and then backtest and refine them as needed. This means your algorithms will operate according to your exact specifications while running on the ProRealTime platform. 

MetaTrader 4

MetaTrader 4 (MT4) is a trading platform with a large community of users who are actively creating and refining trading algorithms. These algorithms are available to you in the MT4 marketplace, which offers a wide range of off-the-shelf solutions. MT4 is also known for its indicators and add-ons, which can help you with chart analysis.

Native APIs

An API enables you to automate trades, integrate data from various sources and create trading algorithms and apps from scratch using coding languages like Java, Excel (VBA), .NET – or any other programming language that supports HTTP. However, creating algorithms via APIs is only recommended for people with a background in programming and coding, because it’s the most complex of the algo options.

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Benefits and risks of algorithmic trading

Benefits of algo trading:

1. Algorithmic trading generally increases the execution speed of trades
2. It helps improve trade execution by eliminating human error and emotional decision-making from the trading process
3. Strategies can be backtested using historical data
4. It facilitates the consistent execution of trading rules
5. Multiple markets can be traded at the same time
6. Transaction costs may be reduced
7. It enables trading capability across different time zones

Risks of algo trading:

1. Technology failures or glitches can lead to losses
2. Over-optimisation of strategies based on historical data, for example, may result in poor performance in current market conditions
3. Lack of human oversight could result in certain market nuances being missed
4. High setup costs may be prohibitive for some
5. Algorithms are vulnerable to hacking or cyber attacks
6. Unexpected market events may be difficult for algorithms to adapt to quickly

* The algorithmic trading strategies discussed on this page have been categorised by us as the top five of their kind based on their historical significance, their widespread use and their versatility across market conditions. While popular, these strategies aren't necessarily the 'best' for every trader or situation. Their effectiveness is generally gauged according to factors such as their implementation, the individual goals of those who use them and market dynamics. We encourage you to use the information on this page as a starting point for further research and to consider your own risk tolerance and trading objectives when evaluating any strategy.