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Understanding the 5 Common Types of Algorithmic Trading Strategies

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Algorithmic Trading

Trading with algorithms is a method that scans and executes multiple indicators at a speed that no human can achieve. It helps traders to approach trading in a calculated and accurate way.

For beginners and expert traders alike, developing a proper strategy to increase the profits and minimize loss is a wise way to trade. This article will provide a walkthrough on some of the common trading strategies used in algorithmic trading.

1.Trend-following Algorithmic Trading Strategies or Momentum-based Strategies

Trend-following is by far, the simplest and easiest algorithmic trading strategies as predictions or price forecasts are not practiced in this strategy. The trades made are straightforward without any complexity; the traders can initiate trading on the basis of popular trends.

Simply put, the momentum-based strategy is the method of following market trends that seek to gain profit from the existing trend using the market swings.

These algorithmic trading strategies involve following trends in moving average, price level movements, channel breakouts, and other related technical conditions. Traders can set profitable technical requirements for buy and sell orders.

Nevertheless, traders need to keep in mind that although the trend-following strategy is easy to implement, it tends to be highly volatile than most approaches.

2.Mean Reversion or Trading Range Algorithmic Trading Strategy

The trading range strategy is based on the assumption that the prices of an asset, high or low, are just a temporary occurrence and will revert to their average value (mean value) periodically. This strategy allows automatic trades to be placed using the defining price range (when the price breaks in or out of its defined range), which is calculated based on historical data.

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3.Arbitrage Algorithm Trading Strategies (Arbitrage Opportunity)

Arbitrage provides a risk-free profit strategy that uses the concept of price imbalances and benefiting from it. Using this strategy, the traders will buy a dual-listed stock at a lower price in one market and sell it at a higher price in another market simultaneously.

Traders that plan to use an arbitrage strategy need to trade in significant positions to make significant profits. This strategy can also be used on stocks versus future instruments.

The key to successful and profitable implementation of an arbitrage strategy is the ability of traders to identify price differentials and place orders appropriately.

4.Index Fund Rebalancing Algorithmic Trading Strategy

Rebalancing involves the buying or selling of assets in a portfolio periodically to maintain the original asset allocation level. Index funds have a set period of rebalancing to bring their holding back to the level of their respective standard indices.

5.Mathematical Model-based Algorithmic Trading Strategy

Following a proven mathematical model allows traders to trade on a combination of options and underlying security, such as the delta-neutral trading strategy.

Trading is not an easy play. The traders can lose out on a lot of money at an alarming rate if the proper strategy is not followed. Although following the algorithmic trading strategies may not be a sure-fire way of earning significant profits, it can help identify profitable opportunities and minimize loss.

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