Algorithmic trading uses computer programs to execute trades based on predefined rules — from simple moving average crossovers to complex machine learning models. The key advantage is removing emotion, achieving consistent execution speed, and backtesting strategies across decades of data before risking real capital.
Strategy types: trend-following, mean-reversion, momentum, statistical. Backtesting and walk-forward analysis. Execution algorithms (TWAP, VWAP, iceberg orders). Risk management automation (position sizing, max drawdown kills). Slippage and latency considerations. Overfitting and curve-fitting traps. Paper trading vs live deployment.
Defined by the algorithm's rule set — examples: MA crossover, Bollinger breakout, RSI oversold + volume spike, or ML model output exceeding confidence threshold. All entries are systematic with no manual override.
Time-based stops, trailing stops, profit targets, or opposing signal. Max drawdown circuit breaker. Correlation with benchmark exceeding threshold (strategy no longer edge-positive). Regime detection flagging unfavorable market conditions.
Any — from tick data for HFT to daily bars for swing strategies. The timeframe is dictated by the strategy's edge and the market's microstructure.
Backtesting is necessary but not sufficient — always walk-forward test and paper trade before going live. Account for slippage, commissions, and latency in all backtests. Diversify across uncorrelated strategies rather than putting all capital into one system.
Grid trading places buy and sell limit orders at regular price intervals above and below the current market price, creating a 'grid' that profits from range-bound oscillations. Each buy order has a corresponding sell order at a higher grid level, generating profit from each completed round trip. It works best in sideways markets and can be automated easily.
Backtesting applies a trading strategy to historical data to evaluate how it would have performed, while Monte Carlo simulation randomises the order of those historical trades across thousands of iterations to understand the range of possible outcomes. Together, these techniques provide both an estimate of expected performance and a probabilistic view of risk, drawdown, and return distributions.
Execution algorithms such as VWAP (Volume-Weighted Average Price) and TWAP (Time-Weighted Average Price) are automated strategies designed to execute large orders with minimal market impact. VWAP algorithms slice orders to match historical volume patterns throughout the day, while TWAP algorithms distribute orders evenly over time. These tools help institutional and advanced traders achieve better average execution prices on large positions.
Trend-following systems identify and ride sustained directional moves using rules-based approaches — moving average crossovers, breakout channels (Donchian, Keltner), and momentum filters. The strategy accepts many small losses for occasional outsized winners, relying on fat-tailed distribution of returns in financial markets.