Algorithmic trading, often referred to as just “algo trading”, is an automated investing method whereby software executes trades according to parameters set by the trader. Algorithmic trading has dominated the global financial markets in recent years; in fact, JP Morgan estimated that only 10% of US trading is now undertaken by standard investors. In this algo trading tutorial we explain how it works with examples, strategies, technical requirements, platforms and brokers.
Algo Trading Platforms
#1 - Forex.com
Forex.com boasts a global reputation with multiple awards and 20+ years experience. Regulated in the US, EU, UK and Canada they provide a huge range of day trading markets, not just forex, and offer competitive fees on a cutting-edge platform. The brand also provides a suite of additional tools, from performance analytics and SMART Signals to advanced charts and strategy builders.
"Forex.com is an excellent broker for active forex traders with over 80 currency pairs, tight spreads, low commissions and powerful charting platforms for day traders. "- DayTrading Review Team
- Instruments: Forex, Spot Metals
- Regulator: NFA, CFTC
- Platforms: MT4, MT5, TradingView, eSignal, AutoChartist, TradingCentral
- Min. Deposit: $100
- Min. Trade: 0.01 Lots
- Leverage: 1:50
- Beginner-friendly web platform and mobile app
- Up to 15% cashback rebates for active traders
- VPS hosting for automated trading strategies
- $15 monthly inactivity fee
- Investment offering varies between countries
- No copy trading platform
#2 - Interactive Brokers
Interactive Brokers is a leading global brokerage that provides access to a comprehensive offering of stocks as well as forex, futures, metals, bonds and cryptos. The firm has over 40 years experience in the online trading industry and is heavily regulated by SEC, FCA, IIROC, and SFC. Day traders can use the proprietary Trader Workstation and can access powerful tools and data feeds as well as comprehensive educational resources.
"Experienced day traders seeking a regulated broker with sophisticated trading software and very low fees should look at IB. Their range of stocks also can't be beaten."- DayTrading Review Team
- Instruments: CFD, Forex, Stocks, Crypto, Futures, Options, Commodities
- Regulator: SEC, FCA, IIROC, SFC
- Platforms: AlgoTrader, OmniTrader, eSignal, TradingCentral
- Min. Deposit: $0
- Min. Trade: $100
- Leverage: 1:50
- Gives day traders unmatched access to global stocks with tens of thousands available from 100+ market centres in 24 countries
- Regulated by some of the world's most reputable bodies including in US
- Low commissions and tight spreads
- Platform and web interface are complex and difficult for beginners to pick up
- Mediocre customer support
- Due to the pricing structure, this firm can be more expensive for aggressive traders who trade over $100,000 shares a day
#3 - NinjaTrader
NinjaTrader is a US-headquartered and regulated brokerage that specializes in futures trading. There are three pricing plans to suit different needs and budgets, as well as ultra-low margins on popular contracts. The brand's award-winning charting software and trading platform also offers a high-degree of customization and superb technical analysis features.
"NinjaTrader is well-positioned to meet the demands of active futures traders looking for low fees and premium analysis tools. The platform hosts top-rate charting features with custom indicators. "- DayTrading Review Team
- Instruments: Forex, Stocks, Options, Commodities, Futures, Crypto
- Regulator: NFA, CFTC
- Platforms: NinjaTrader Futures, eSignal
- Min. Deposit: $50
- Min. Trade: 0.01 Lots
- Leverage: 1:50
- Thousands of add-ons and applications from developers in 150+ countries
- Free platform access and trade simulation capabilities
- Widely respected and heavily authorized by the NFA and CFTC
- Non forex and futures trading requires signing up with partner brokers
- Premium platform tools come with an extra charge
- Withdrawal fee on some funding methods
#4 - eToro USA
eToro is a social investing platform that offers stocks, ETFs, options, and crypto. The broker is well-known for its user-friendly community-centred platform and competitive fees. With FINRA and SIPC oversight and millions of users across the world, this brand is highly respected. eToro securities trading is offered by eToro USA Securities, Inc.
"eToro is a top pick for traders looking for social investing and copy trading. With a low deposit, zero commissions and an intuitive platform, the broker will meet the needs of newer traders."- DayTrading Review Team
- Instruments: Stocks, Options, ETFs, Crypto
- Regulator: SEC, FINRA
- Platforms: Own
- Min. Deposit: $10
- Min. Trade: $10
- The $10 minimum deposit and straightforward account opening process means beginners can get started quickly
- eToro USA Securities is a trustworthy, SEC-regulated broker that is a member of FINRA and SIPC
- The online broker offers an intuitive social investment network with straightforward copy trading on cryptos
- Narrower range of instruments than some competitors
- No MetaTrader 4 platform integration
- Execution speeds trail the fastest brokers
#5 - OANDA US
OANDA is a popular brand offering exceptional execution, low deposit requirements and advanced charting and trading platform features. The top-rated brand has over 25 years of experience and is regulated by trusted agencies, including the NFA/CFTC. Around the clock support is available, alongside flexible contract sizes and automated trade executions.
"OANDA is an excellent broker for US day traders seeking a user-friendly platform with premium analysis tools and a straightforward joining process. OANDA is also heavily regulated with a very high trust score."- DayTrading Review Team
- Instruments: Forex, Crypto
- Regulator: NFA, CFTC
- Platforms: MT4, TradingView, AutoChartist
- Min. Deposit: $0
- Min. Trade: 0.01 Lots
- Leverage: 1:50
- Low minimum deposit for beginners
- US clients accepted
- API facilitates access to 25 years of historical data and rates from 200+ currencies
- Customer support not available on the weekend
What Is Algorithmic Trading?
Algo trading is essentially inputting a set of quantitative instructions which a computer program follows. It is typically a high-frequency trading solution, with the ability to make automated trades simultaneously across multiple markets. This enables corporate investors to execute a significant volume of trades immediately. The volume and speed of trades are greater than any human could achieve; thus, making it a potentially effective solution.
Using an algorithmic trading robot reduces the risk of manual errors so trades can be executed more efficiently. Many types of traders use algo trading, from short and long-term participants to institutional investors. The mathematical, methodical approach is an alternative to manual, sometimes emotion-driven trading.
Algo Trading Directions Example
- Buy 5,000 Google shares (Alphabet Inc Class A) if the price falls below 1,500 GBP. If the price falls further below 1,500 GBP, sell 200 shares for every 0.5% decrease. For every 0.5% increase in price beyond 2,000 GBP, buy 200 shares.
- Buy 1,000 Google shares (Alphabet Inc Class A) if its 10-day moving average increases above the 50-day moving average.
In this day and age, there are a wealth of platforms and independent programmers who can handle the bulk of the algo trading technical side. Knowledge of programming would be preferable, and some programmers will want to design their own trading system. To do this they will require:
- Programming knowledge
- Backtesting capabilities
- Historical data for testing
- Order placing capabilities
- Access to market data feeds and prices
Python, Java and C++ are a few of the most used programming languages, with Python the top choice. Developed by Guido Van Rossum, Python code is reputed for its syntax and ease of use.
For beginners, learning a programming language and doing it yourself has a couple of benefits. Firstly, it could be more financially efficient than hiring an external programmer to create your algorithm. Secondly, when you need to alter strategies, you have more control over the algorithms. Nonetheless, retail trading platforms can often handle most trader’s demands, so this is not essential, and could make for arduous work. Fast network connectivity is a prerequisite.
Online forums and books offer detailed tutorials, such as AlgoTrading101, Quantitative Trading by Ernest Chan, and Inside the Black Box by Rishi K. Narang.
Pros Of Algo Trading
One of the biggest pros of algo trading is eradicating the influence of human emotion. Psychological factors can lead traders to execute trades impulsively, based on feelings. The systematic approach of algo trading means positions are be executed when target conditions are met. During the 2008 financial crash, many investors ignored signals that markets were about to crash and lost money. An algorithm in this circumstance could execute trades according to the warning signs.
The speed of order execution allows trades to be executed instantly when criteria are reached. Algo platforms can execute thousands of trades in less than a second. This also feeds back to the manual error element, whereby it is possible to execute trades too late. This is why algo trading is a high-frequency solution, often used by institutional companies.
Backtesting and historical data enable the trader to explore previous trades, refining and improving strategies as a result. Once a strategy is cemented, automated trading can increase the efficiency of implementation.
Big trades have the potential to manipulate market prices (distortionary trades). A larger investor can utilise algo trading to spread a significant trade across a range of smaller trades. In doing this, you can evaluate the effect on market prices as the trade takes place.
Cons Of Algo Trading
Using Algo trading can cause flash crashes and immediate loss of liquidity. On the 6th May 2010, in the US, the Dow Jones went down 998.5 in under 36 minutes. It picked back up again straight after, fortunately the volatility of stock prices made it a prime trading opportunity.
Torsten Slock put algo trading on his list of the 30 biggest risks for financial markets. Despite laws being introduced to reduce the risk of future crashes, there is still a risk of market manipulation.
False trends can be created and rapidly exacerbated by automated trading software. Stanley Druckenmiller, esteemed investor and hedge fund manager, said “Algos have taken all the rhythm out of the market”
The ever-changing nature of the technological world means you need to be aware of software updates and technical issues. System failures and connectivity issues could lead to substantial losses. News of algo trading and machine learning often focuses on the success stories but things can go wrong.
Faulty programming can be devastating. In 2012, Knight Capital had created a platform that would link with the new, New York Stock Exchange (NSE). When they launched their software it malfunctioned, resulting in the company losing money at a rate of around $10,000,000 a minute. They lost around $440 million in total.
Naturally, the systematic nature of algorithmic trading means that winning opportunities can often be missed as the algorithm is only looking for particular indicators. Sometimes intuition and hunches pay off.
Algo trading is based on data, numerical objects such as price, moving averages and volume, amongst other things. As a result, common strategies tend not to involve any intuitive predictions and suchlike. Quantitative trading models are implemented using algorithms to complete trades without human intervention. We’ve listed some common strategies below.
Trend following practices analyse data to identify trends. These tend to be related to moving averages, breakouts and price fluctuations but could be any technical indicators or concepts that you understand and are comfortable using.
Technology can now scrutinise large amounts of data across a variety of these criteria, thus being able to identify trends far quicker and more accurately than a human. The system could analyse data on, say a 50-day moving average, 100-day moving average, channel breakouts and more. The system would then automatically buy or sell the stock depending on whether the collective data reveals buy or sell signals.
Scalping is the process of buying and selling instruments rapidly, profiting off small price changes. Algo trading will take care of this process faster than a human could, ensuring the instrument is sold efficiently at the target price.
If a stock is listed on multiple markets, its price can vary. The stock can therefore be bought at a lower price and sold on another market where the price is higher, resulting in an arbitrage profit. The benefits of utilising algo trading for this strategy are again efficiency.
Delta Neutral Strategies
Delta neutral strategies protect the trader’s portfolio against market movements. Delta is a ratio comparing the change in the price of an underlying security with the change in the price of its derivative. By holding multiple positions, it is possible to balance positive and negative deltas so the overall delta becomes 0. The continuous fluctuation of markets makes it impossible to sustain a delta neutral portfolio manually; however, algo trading can manage the delta of your position with ease.
Moving Stop Losses
Stop losses offer protection over your funds. Given the nature of markets and their often high volatility, it can be difficult to manage risk. By using algo trading, you can adjust stop losses automatically based on a diversity of criteria. If a stock moves in a positive direction, the stop loss can move with it, for example.
Algorithmic Trading Platforms and Brokers
When it comes to algo trading, deciding whether to self-build or choose a provider with established tools is down to the individual trader. The do-it-yourself method has benefits, but using a recommended solution is often an easier way to start.
It is important to familiarise yourself with the trading platform before beginning to algo trade so if demo accounts are an option, it would be advised to use one to trial strategies. The following platforms and websites are popular and use a variety of algo and automated trading methods. These include trading robots (bots) and copy trading, open-source trading, signals and semi-automated options:
- MetaTrader 4 (Expert advisors) – Utilising expert advisor trading robots, MT4 is regarded as one of the best systems for forex algo trading. MQL4 is the language used, similar to C. Features include a wide range of indicators, mobile apps and a demo account.
- MetaTrader 5 – Known as one of the best for CFD algo trading, MT5 uses MQL5 language, based on C++. Like MT4, MT5 uses Expert Advisors (EAs). Key features are a range of additional technical indicators to MT4, a simpler language, DOM data and more.
- cTrader – cTrader is primarily aimed at retail investors who want to trade in an electronic communication network (ECN). Key strengths are execution and charting abilities. cTrader used cBots.
- eToro – eToro is an FCA-regulated broker, best known for its automated social and copy trading features. eToro CopyPortfolios algorithmically select the top 50 traders, most likely to be profitable, each month. Your trades can then be automated to follow these experts.
- ProRealTime – ProRealTime is designed for advanced traders who require in-depth technical analysis and market views. You can write your own code or use the Wizard function to write it for you.
- QuantConnect – Since Quantopian shut down in November 2020, the majority of users migrated to QuantConnect. They offer an open-source algo trading engine, where traders can test strategies for free, and then pay a fee to trade live with Interactive Brokers. It is written in C# but supports python and F#.
There are a host of retail trading brokers which now offer algo trading. The following brokers are compatible with the platforms above or offer their own proprietary systems. Some of the frontrunners include:
- Interactive Brokers – You can trade stocks, options, futures, currencies, bonds, ETFs, CFDs and more with Interactive brokers. They offer their Trader Workstation platform and APIs.
- Pepperstone – Offering spread bets and CFDs on forex, commodities, indices and more. Platforms available at Pepperstone include MT4, MT5 and cTrader.
- IG – IG has an extensive list of instruments to trade, including forex, cryptocurrency, stocks indices, commodities and more. IG offer their own trading platform alongside MT4, ProRealTime and L2 Dealer, voted the best Multi-Platform Provider at the ADVFN International Financial Awards.
- AvaTrade – AvaTrade is a forex and CFD broker that offer a variety of platforms, including MetaTrader 4 (MT4), MetaTrader 5 (MT5), AvaOptions, ZuluTrade, and DupliTrade.
We’d always recommend opting for a broker subject to local regulations. It’s also worth keeping an eye out for brokers with a range of algorithmic trading guides, tutorials and training courses to help upskill your excel and coding knowledge, for example.
Final Word On Algo Trading
Just like traditional trading, automated trading comes with its risks, particularly on the scale of institutional, high-frequency traders. Algorithmic trading has completely transformed the modern trading environment. It is open to debate as to whether this is positive or negative as a whole, but it can come with great benefits. Systems, strategies and technology which were once limited to hedge funds and larger cooperate investors can now be utilised by ordinary investors. Retail investors of all types now have access to algo trading systems which remove emotion from their investments. But always remember, profits and returns vary, so it’s key take a careful approach to risk management.
Is Algo Trading Worth It?
Algo trading contains risk, just as ordinary trading does; however, it can handle a frequency of trades simply impossible for a human to execute. As a mechanical system, algo trading reduces the influence of human psychological factors which can lead to impulsive and reckless decisions.
How Do You Do Algo Trading?
Algo trading has been made easier for retail investors. In the 1980s, you had to program your own platform and algorithms, but it is now easier than ever before to algo trade. Whilst programming your own solutions has its perks, you can outsource the programming. There are also a wealth of platforms that handle the bulk of the technical side nowadays.
Is Algo Trading Legal in India?
Algo trading is legal in India. It was made legal in 2008 and algorithmic trading now equates for around 50% of all trades on Indian markets. There isn’t currently guidelines for retail investors. There are many algo trading platforms and brokers in India, including Zerodha, 5Paisa and more.
Is Algo Trading Safe?
It is important to note that algo trading doesn’t get rid of risk. The majority of traders lose money, algo trading or not. Using simple algorithms, rigorous backtesting and a secure, renowned platform is a good place to start.
Is Algo Trading The Future?
Algo trading has already reshaped the current trading climate. It has been estimated that 80% of the US stock market is dominated by algo trading.
How Do You Create An Algo For Trading?
Creating an algorithm for trading requires knowledge of a programming language, a strong understanding of financial markets and familiarity with investing strategies.