In this blog post, we will review an Algo trading strategy you can beat. Trading algorithms are many times perceived by traders as these powerful decision-making enemies that are smarter and faster than us. Yes, they are definitely faster, but you need to understand that they simply follow a set of instructions on which they need to execute. They have a clearly defined risk profile (covering the position), size management, and steps they need to follow. Understanding what their weaknesses are can give you an advantage in formulating a strategy that can actually beat them. Let’s have a look at what we mean by that.
The content of this post is based on the video down below:
We must understand that algorithms operate on the basis of statistical norms. Their execution is emotionless. This is their first great advantage. Another indisputable advantage is their ability to instantly react to data. Rather than trying to beat them in their superior domains, we should focus on moments when they are actually already in a position. Like you and me, they have to offload the liquidity they have acquired. That is one approach we can take in order to beat them.
The second approach is non-binary events. Algorithms can’t trade around non-binary events. In a grayscale of an event, algorithms are still having a hard time interpreting it well, lacking the emotional ability in the voice tone shift or stories implications.
With many more examples that we won’t cover today, a goal of a human trader is to reverse engineer their “code” and use it as an advantage. Let’s have a look at one of the many Algo strategies we can reverse-engineer.
Example Of Mean Reverting Trading Algo
Imagine yourself in a situation when the market is trading in a well-defined range, average volume, no dramatic shifts. Suddenly a large move, multiple standard deviations of scale happen. The algorithm calculated, based on statistical data, that this event is likely to reverse into the mean and starts to load size in the opposite direction of the move. It follows predefined rules. But there is one thing it cannot do well, which is to interpret the news. You, on the other hand, having the right amount of knowledge can. And that is your advantage.
As the Algo loaded size, the second this move stops mean-reverting, that is your advantage. You understand the reasoning why the move happens and why it stops, the algorithm is holding large order it has accumulated and will seek liquidity to exit the move the moment it stops going, which will push prices in the opposite direction. In simple terms, the moment it goes wrong (not according to the statistical plan), they have to get out and that is your chance to profit from it.
Key Trading Takeaway
The key trading takeaways are:
don’t try to beat them, try to understand how they operate
understand how the Algo operates via the rever-engineering method
prepare a strategy that will use their weakness to your advantage
Thanks for reading.
If you liked this type of content, you might check these videos as well:
Do you like what you have been reading? If you would like to improve your game, definitely check one of our courses that teach you all the techniques presented by AXIAtraders from amarket profile,footprint, ororder-flow. If you are someone who likes to trade the news, we have a greatcentral bank course. And if you are really serious about your future trading career, consider taking AXIA’s 6-Week Intensive High-PerformanceTrading Course.
Thanks for reading again and until next time, trade well.
For example, if they see X Y and Z happening, they know some sort of action is soon to follow because the algorithms are programmed a certain way, so they try to beat the market by reacting in front of that surge or decline. Algorithms are now responsible for a majority of market trades.
If you want to beat the computer algorithms come up with a better set of reliable instructions that you can implement on a timeframe that works for you. Once you've done that stick to your plan, if it needs revision over time then you can update it.
One of the simplest and most widely known fundamental strategies is value investing. This strategy involves identifying undervalued assets based on their intrinsic value and holding onto them until the market recognizes their true worth.
He built mathematical models to beat the market. He is none other than Jim Simons. Even back in the 1980's when computers were not much popular, he was able to develop his own algorithms that can make tremendous returns. From 1988 to till date, not even a single year Renaissance Tech generated negative returns.
The success rate of algo trading is 97% Once you set the desired trade parameters, the program will do all the work. Bots monitor your trades to ensure you don't reach a loss point, leading to a success rate of up to 97 percent.
On average, algo traders may achieve a profit margin around 1-3 times their acceptable drawdown. Successful traders with superior strategies and larger capital tend to make more.
Yes, it surely is, as you can become a self-employed algo-trader or work for a firm that relies on algo-trading to make investments in the stock market. As discussed in one of the above sections, to be able to perform algo-trading, you must have knowledge about computer programming and financial markets.
In conclusion, algo trading can be a profitable method of trading, but it is not without its challenges. Traders need to be aware of the risks associated with algo trading and take steps to mitigate those risks.
If you know how to code or have an understanding of coding languages then you can explore more about algorithmic trading. Statistics also plays an important role here. If you know how to calculate statistical problems and advanced charting, then you can easily make better trading decisions.
Since algo-trading does not require human intervention to make buying or selling decisions, algo-trades have a much higher accuracy. They are free of all human-made errors. For example, the algorithm will not misenter the quantity of units meant to be traded.
The market is unpredictable and constantly evolving, making it difficult for any single trading strategy to be effective in all conditions. A 100% trading strategy may work well in certain market environments but fail miserably in others.
This trade is like going long but in reverse and will be profitable if the price of the deliverable decreases before expiration. For example, if you expect the price of crude oil to fall before the contract's expiration, you could go short oil futures by selling that same CL contract on the NYMEX.
One strategy that is quite popular among experienced options traders is known as the butterfly spread. This strategy allows a trader to enter into a trade with a high probability of profit, high-profit potential, and limited risk. The basic butterfly can be entered using calls or puts in a ratio of 1 by 2 by 1.
QuantConnect is an integrated algo trading platform to be used with Lean (an open-source engine). It is a cloud-based environment where one can design, backtest, and go live to trade with quantitative trading algorithms on many asset classes like equities, forex, and cryptocurrencies.
Introduction: My name is Fr. Dewey Fisher, I am a powerful, open, faithful, combative, spotless, faithful, fair person who loves writing and wants to share my knowledge and understanding with you.
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