Algorithmic trading has been one of the hot topics amongst traders of all levels. Expert advisors allow investors to trade the market with full automation and generate a passive income.
The trading robots are coded with strategies with the help of a specific programming language. According to the information, they open and close trades on particular instruments and handle them accordingly.
There are no limits on the kind of algorithms that can be coded. To understand their nature and uses, we will go through all the characteristics of trading robots and discuss the potential benefits and demerits.
How does algorithmic trading work?
Before going deep into the topic, let us cover how traders can use them in their portfolios.
- For using a trading algorithm, you have to develop the code for the software it is supposed to run on
- It is essential to use proper hardware with good computing power to match the needs of the trading software and the expert advisor
- After attaching the robot onto the charts, it will give signals or trade the markets
Traders can try automated trading software using their desktop computers or laptops with an internet connection providing access to the broker.
Essential Characteristics of Trading Algorithms
Trading algorithms are applicable on all markets, whether cryptocurrencies, stocks, forex, or indices.
Types of EAs
Trading robots vary from one another depending on strategies and functionality. As mentioned before, they can be used to trade the market on auto mode or get signals for manual execution. A few common types of algorithms are:
- High-frequency trading robots get in and out of the markets in a few seconds. They do not hold positions for the long term and require a fast connection with extremely low latency. The spreads on the account must also be minimal
- Arbitrage systems dwell on the latency in quote updates between brokers. Similar to HFTs, they exit the positions immediately when in profit.
- Grid and martingale robots are common in the financial markets. While they can be profitable for the short term, the drawdown is high and, in most cases, can cause a margin call on the account.
- Indicators are used for getting signals for manual execution. While most traders would not classify them as expert advisors, they come in the broad category of manual experts.
- Other than this, robots can be developed for a specific instrument and named after it. For example, gold EA trades on XAUUSD.
One of the important things to note while developing an algorithm is backtesting. It allows traders to determine if their system can be useful in the future and if the strategy is fit for the desired instrument. Historical testing can be done within the trading software. Depending on the program, it might be possible to adjust the latency in trades and spread conditions.
Optimization features are helpful as they allow traders to find the best working conditions for the EA automatically. This eliminates the need for a manual search, which can take days or weeks.
Learning how to code is one of the important steps towards algo trading. There are different languages that traders can use, including python, C++, Java, MQL 4, Matlab, etc.
While each language has its own pros and cons, it is vital to select the one you feel comfortable with. Understanding the basics of programming can help avoid errors in your Expert Advisor.
Algorithms are the future of trading as they allow traders with no experience to earn good passive income. Some investors code their systems and sell them online. Before purchasing any EA, it is vital to look at the backtesting and live records.