Algorithmic Trading
Algorithmic trading removes emotion from execution. Automate your strategy and remove the human error.
What Is Algorithmic Trading?
Manual trading: Human analyzes → Human executes
Algorithmic: Strategy rules → Auto executes
Advantages:
- No emotion
- Consistent execution
- Scale without stress
- 24/7 operation
Algo Types
1. Execution Algorithms
Purpose: Enter/exit at optimal price
| Algorithm | Use |
|---|---|
| TWAP | Time-weighted average |
| VWAP | Volume-weighted average |
| Execution | Minimize market impact |
2. Strategy Algorithms
Purpose: Execute strategy automatically
| Algorithm | Use |
|---|---|
| Trend following | Follow trend automatically |
| Mean reversion | Reversion to mean |
| Breakout | Breakout automation |
3. High-Frequency (HFT)
Purpose: Ultra-fast execution
| Algorithm | Use |
|---|---|
| Market making | Provide liquidity |
| Arbitrage | Price differences |
Building an Algorithm
Step 1: Define Rules
Entry: RSI < 30
Exit: RSI > 70 or 2% stop
Timeframe: Daily
Step 2: Write Code
if rsi < 30:
enter_long()
elif rsi > 70:
exit_long()
elif drawdown > 2:
close_all()Step 3: Backtest
Test on 1+ year data
Check metrics
Adjust parameters
Step 4: Forward Test
Demo trading
Real-time monitoring
Adjust if needed
Step 5: Go Live
Small capital first
Scale up gradually
Always monitor
Algo Building Platforms
For Beginners
| Platform | Language | Use |
|---|---|---|
| TradingView | Pine Script | Simple strategies |
| MetaTrader | MQL4/5 | Forex EAs |
For Advanced
| Platform | Language | Use |
|---|---|---|
| Python | Python | Custom everything |
| NinjaTrader | C# | Futures |
| QuantConnect | C#/Python | Quant strategies |
Algo Risk Management
1. Kill Switch
if daily_loss > 5%:
stop_algo()
2. Circuit Breaker
if drawdown > 10%:
pause()
notify()
3. Position Limits
max_position_size = 0.1 * capital
4. Time-Based Stop
if no_trade > 4_hours:
end_session()
Common Algo Mistakes
1. Over-Fitting
Problem: Curve-fitted to past data.
Solution: Out-of-sample testing.
2. No Kill Switch
Problem: Algo runs wild.
Solution: Always add kill switch.
3. Execution Slippage
Problem: Live fills worse than backtest.
Solution: Account for slippage.
Key Takeaways
- Automate execution — Remove emotion
- Backtest first — Verify strategy
- Kill switches — Always add
- Slippage — Account for it
- Monitor always — Never fully hands-off
Related
order-flow.md >>>
smc.md >>>
Automate the process. Trade the edge.