Trading Education, Trading Tools Tips

What Goes Into the Development of Algorithmic Trading Strategies?

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Algorithmic trading has made headway in the world of finance, and doesn’t appear to be going anywhere any time soon. Many traders utilize the tools algo trading offers because it establishes an added degree of precision for market analysis, enter/exit strategy, etc. Its computerized aspect and technical components have already begun to separate those who are adapting as tech-savvy traders, versus the traditional traders who rely on other chart patterns and news interpretation for success. In some cases, algorithmic trading has proven to be an extremely successful method for trading and analyzing markets. However, devising a line of code or formulating a completed and ready-to-test strategy isn’t a simple process.

Pros/Cons of Algorithmic Trading

There are many benefits of Algorithmic trading. The biggest and most important pro of algorithmic trading is the freedom you have to explore any market or time frame. In a world where diversification is key, there is no limit to how many lines of code you can write or how many markets you can invest in. With algorithmic trading, you can better assess certain markets by allowing trial and error to weed out unsuccessful strategies. Finally, you can access your notes and history of trading through the code you have written for a certain strategy. 

On the other hand, algorithmic trading can expose traders to new risks. For instance, an algorithm may not recognize qualitative shifts in the global macroeconomic environment. Accordingly, the algorithm may keep trading a specific price point despite a paradigm shift which renders that price point irrelevant. Accordingly, algo trading strategies should have tight stop loss orders to protect against such blind spots. 

Challenges of Algo-Trading

Some of the greatest challenges of algorithmic trading can actually start with the user. It seems that most successful traders always preach about two aspects of a traders personality that need to be prominent to avoid failure. Those two traits are psychology and edge. In order for a trader to become successful they have to believe in themselves, be passionate about what they trade, having an unwillingness to fail and be unemotional. Nevertheless, having an edge is almost, if not more important than someone’s psyche. Without an edge in this industry, there is no strategy that will lead you to success. How will you distinguish yourself from the thousands, or tens of thousands of traders all competing with each other? Doing research and practicing your strategy over and over again is very important. Getting to the point where you understand or know something about a certain market the person next to you doesn’t, means you’re on the right track. 

Also, learning how to properly test and evaluate a strategy is also a great challenge that can take years to master before entering the market. In a world filled with websites, podcasts, and blogs, it may seem that you have all the tools needed to formulate a great strategy, but that’s just the start. Reading through, analyzing and taking away from ideas that seem to work can be an extremely lengthy process and before you enter into the market, you will need to test your methods.. Practice might not make perfect, but without it, traders will not be able to make profit. Overcoming these obstacles will enable traders to elevate their strategies towards success. 

How to Build an Algorithm

In order to build an algorithm that works for you, sorting out your goals and objectives will help set your expectations. Understanding what you value as a trader and what you want to get out of each trade is a very important starting place. You will be able to narrow your search for markets and get a bigger picture idea of what you want to get out of each market. An algorithm begins with many ideas. What can be known as a “strategy factory” is a metaphor for a real factory; trading ideas come into your factory and whatever comes out is a full blown strategy, or junk which is what happens to most ideas. Part of having a factory is having a lot of ideas to test in order to optimize efficiency. 

As a trader, you should always have a bank of ideas to test in future markets, never without a shortage. The next phase is to test an idea. After writing code for a strategy, you should test it in a demo account or with a backtester. Of note, simplicity is generally favorable. If one idea requires a lot of code and takes an exorbitant amount of time to analyze in the market, odds are it is too complicated and won’t work. Next, after some preliminary examinations of a strategy, you should put the strategy through random simulations. This can be known as an incubation, where you let the strategy sit on a shelf and check it once or a few times a month to view its results. At the end of a certain time period, you can decide if the strategy is worth enough to apply to a market, leave it for a little longer, or to simply trash it altogether. 

It can be smart once you are closer to trading full-time, to have anywhere from 100-150 strategies a month to check so that you are making most of your time. It is also very important to give yourself a specific criteria or threshold of success from moving a strategy from one phase to the next. If you find an idea that never tested well, there is no point in spending any more time trying to make an unsuccessful strategy successful. It can be worth your time to focus on ideas that have a greater chance that you could later apply towards a legitimate strategy. Only allowing the best of your ideas to blossom will give a trader better odds of success. There are stages in which traders test their ideas and apply them to strategies so that they can effectively maintain an edge. 


Algorithmic trading has taken the financial world by storm, and has proven to have tremendous upside. Like many strategies, algorithmic trading has pros and cons associated. Algo trading has no limit to where or how you trade, which means crossing many markets and time frames. Through trial and error of code, algorithm trading provides traders with another level of precision when investing in a certain market. However, algorithmic trading is not necessarily all sunshines and peaches. Without being realistic with yourself and setting parameters when testing certain markets, you can be doomed to fail. Paying attention to the markets very closely is important when avoiding failure. Like most things worth it in life, they don’t come easy. 

The greatest challenge in algo trading begins with traders themselves. Working on and improving an individual’s psychology will better set themselves up for success. In an industry as competitive as finance, great traders have a way that differentiates themselves from the mediocre. Finding an edge whether that is in a single trade, market, or in the entire industry can catapult someone towards success. In addition, being able to properly test and evaluate strategies in markets can be just as important. If a new trader cannot recognize whether a certain strategy works or not, they have a lot of work ahead of them. 

Lastly, building an algorithm follows a method of procedure. It all starts with ideas, which bloom into tests for the market. Once a successful test is made, a trader can use random simulations for further examination of a strategy and later can decide whether this strategy is worth applying to the real market. Being very honest and hard on yourself when putting ideas through testing and evaluation will increase your chances at formulating an extremely successful strategy. Algorithmic trading can propel a trader’s career to heights they didn’t know were possible. Through hard work, dedication and practice, a trader can use all of the advantages algo trading has to offer. 

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