Algorithmic trading strategies

Now that you understand how algo trading software works, we need to discuss some of the strategies that the protocol is programmed to execute. Although the number of strategies that can be provided is unlimited, below are some commonly used examples.

Momentum Trading

Momentum trading is a popular strategy used by experienced traders. So of course it makes sense for algo systems to use it too. For those who don't know, momentum trading is the process of jumping on a trend until the trend is no longer in play.

For example, let's say Apple shares have been on an uptrend for four weeks in a row, with no clear reason to believe the trend will stop soon. With this in mind, the algorithmic trading protocol will attempt to enter positions when a market correction occurs.

Market corrections during a bull market are often attributed to investors holding on to their profits - resulting in a slight movement in the opposite direction. However, if there is no reason to believe that the momentum is due to a slowdown, the algorithmic trading protocol will attempt to buy the dip.

Similarly, if the asset is in a bear market, this is also the case. However, the bot will place a sell order if the asset corrects upwards.

Arbitrage trading

Arbitrage trading is a highly effective strategy that essentially guarantees a profit regardless of which way the markets move. The overarching concept is to profit from an asset whose price is indifferent on two or more exchanges.

For example, let's say:

•     The purchase price of Nike shares on exchange 1 is USD 85.00.
•     The selling price of Nike shares on Exchange 2 is 85.20 USD

In layman's terms, this means that you can place a buy order for Nike shares at 85.00 USD and a sell order at 85.20 USD. Regardless of which way the markets move, you make an ultra-small but guaranteed profit of 0.24%.

There are a few important points to keep in mind when arbitrage trading.

Time constraints

First, when opportunities arise, they rarely do so for more than a few seconds. This is far too small a time frame for a human trader to place the necessary trades.

In fact, you could end up losing money if you can only place one out of two trades at the required price. On the contrary, algorithmic trading software can place the required buy and sell orders within milliseconds.

Liquidity

Secondly, there is only a certain amount of liquidity available - at the required entry points for both the buy order on exchange 1 and the sell order on exchange 2. This not only means that the human trader has to calculate exactly how much they can invest in each trade to maximise their profit, but also they would have to do this at record speed.

By the time the human trader is able to do this, some or all of their liquidity will have been used up. With this in mind, the algorithmic trading bot can achieve the above in milliseconds.

Medium revision trading

An additional trading strategy in metatrader 4 exness that algorithmic software can easily provide is mid-revision. This centres on the theory that an asset will revert to its historical price average at a certain point in time.

Although an asset might statistically deviate from its historical price range, a severe upward or downward break should reset the mean. For example, suppose the algorithmic bot was assigned to trade the Dow Jones. To keep things simple, we will say that the Dow historically trades within 5% of its 200-day moving average.

If the Doe Jones enters a short-term bear market and subsequently loses 20% within two months, the algorithmic trading protocol might decide to place a buy order. This would occur because statistically there is a probability that the Dow Jones should return to its /- 5% range of the 200-day moving average.