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How to get started building an algorithmic trading system?

AI-trading vs algo-trading

What is an Algorithmic Trading System?

To learn how to build an algorithmic trading system, let’s first ensure that we understand what algorithmic trading is. Algorithmic trading, often referred to as algo-trading, is a system that uses computer programming to follow a set of instructions programmed by the user to trade. Typically, the user would set a variety of variables including time, price, and quantity, so the computer can buy or sell stocks at the best possible prices. Algorithmic trading is beneficial as it can process orders at a much faster speed than possible by humans, and with lowered transaction costs. There is also a significantly reduced risk of manual and other human errors when using algo-trading.

How to build an Algorithmic Trading System?

There are many steps to consider when deciding to build an algorithmic trading system. First, before you can properly build an algorithmic trading system, it is important that you have an understanding of how the markets work and the right technology. Then, you can start by making a trading plan, that is, a systematic method to identify trading opportunities taking into consideration variables such as time, risk, etc. The purpose of making a trading plan is to help control against making the impulsive emotional trading decisions. After coming up with a trading plan to get the computer to follow, you should validate it with different stocks and positions to ensure it works as expected. It is very important to test your plan along the way to avoid any errors. 

How to Convert your Trading Plan into an Algorithm?

In this part of the process, it is important that you have the right technology and skills to write an effective computer program. There are many softwares that can help you convert logic into code for those who are inexperienced in computer programming. Nonetheless, it is important to be very careful in this step as computers follow exactly what you tell them to do, so you need to make sure you are specific in translating your trading plan into working code. Next, it is essential that you test your code thoroughly using historical data. Just like you tested your trading plan manually before, it is important that you test the computer program so it works as desired. 

When building an algorithmic trading system, it is important that you incorporate different risk factors and optimize the parameters. For instance, the program should account for special cases where the market could drop drastically. Considering different risk factors helps ensure the prices cannot drop beyond a certain limit without selling the asset to prevent extreme loss.

All in all, building an algorithmic trading system can be a lengthy and tricky process, but there are many benefits since it is not impacted by human emotions and impulses. Once you have built an algorithmic trading system, it allows you to process orders at much faster rates than possible manually. It is very important that you continue to test and revise your trading strategy and algorithm as the markets will change overtime. I hope this helped you gain a deeper understanding of the necessary steps to build an algorithmic trading system.

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