What are the Most Popular & Profitable Algo Trading Strategies?

 

Algorithmic or Alog-based trading is also very popular in the stock market to get better returns compared to traditional human intelligence-based trading. It is not only giving better returns but also doesn’t need too much time to take the decision and execute the transaction, every trade happens within a fraction of a second, backed with AI-based algorithms.

Traders across the globe use the day trading algorithm and make hefty amounts of money in the equity market, commodity and forex trading. If you are also interested in trading try the Algo-based trading where multiple types of strategies can be applied as per the trend and sentiments of the market with better chances of getting returns from trading.

Algo-trading software has all types of strategies fed through the algorithms and you just need to activate or enable which strategy you want to use while trading in the market. Here you need to understand what are trading strategies mostly used by traders and which trading strategy can is suitable for you and give you the highest returns.

Simple Algo Trading Strategies

Before we move on to the other trading strategies let’s start with simple algo trading, that are commonly used by traders to earn some profits. These strategies are not only simple but also easy to use and implement in various market scenarios.

Momentum: It is one of the most simple algo trading strategies you can easily apply while trading in the stock market. When there is momentum in any stock, traders pick such stocks with the hope that they will move further and can give some returns. In this strategy, technical indicators like Swings, RSI, Support & Resistance, Moving Averages and Breakouts are used to find the levels of momentum and the right levels to buy the stocks.

Trend Following: Understanding the trend of the stock market is very important to trade profitably. You can check the market heat map to check whether most of the stocks are trading negatively or positively. It is recommended to buy the stocks in an uptrend and sell in in a downtrend. In the Algo trading strategy, the trend following-based trading is implemented through the algorithm.

Market Timing: Perfect timing to enter into a trade is also one of the main factors to make your trade successful. Traders can wait to buy at the low point but missed the all-time low. Similarly, at the time of selling the stock at a higher price, missed the timing, as the stock moves further and can give more returns. But Algo-based trading can find such right timing to buy, sell or book profits into the trade position.

Arbitraging: This is one of the oldest and very simple trading strategies traders use to take advantage of price discrepancies of the same stock trading on different stock exchanges.In arbitraging the action involves at the same time purchasing and selling the same stock in different markets.

Though the price difference is very minor, you can make profits from small but multiple trades in huge volumes. Algorithms can easily keep an eye on such stocks trading with the major price differences and simultaneously can create both buying and selling positions at a much faster speed compared to humans, helping traders to generate profits.

Most Popular Algo Trading Strategies

Apart from the above-listed simple algo trading strategies, there are some most popular algorithmic trading strategies that most traders or broking houses use in their daily trading strategies. Let’s find out what are these popular Algo trading strategies.

News-based Trading: Any kind of news related to a listed company also affects its stock price movement. A corporate announcement, quarterly financial results, acquisitions, bagging large orders and economy or sector-related news can affect the stock price positively and negatively. Algorithms can analyse such news through social media and other relevant websites to find out the company-related news and relate the same to take the opportunity of buying or selling the stock.

Pairs Trading: Paring the two stocks for trading can give the advantage of moving the stocks of two different industries in opposite directions. In this strategy, the market is trending upwards or downwards but two both stocks move on either side and create a hedging position for each other. Algorithms can find the relationships between such stocks, and the industry or sector analysis and use the historical price movement in different market conditions and decide which and how to create the right trading position.

Swing Trading: Swing trading involves the practice of taking advantage of creating a position on both sides of market movements. In swing trading, you can make profits from the erratic movement of the market, as the price oscillates between the overbought and oversold zones. During the day trading algorithm spots the swing highs and lows to create the trade positions at the right support or resistance levels.

Black Swan Catchers: It is a financial term, used to describe an unpredictable event that can occur beyond normal expectations but have potentially disastrous results. Natural calamities, or the recent COVID-19 pandemic are examples of black swan events. Catching the black swan is the investment strategy that leverage the extreme market volatility due to such events. Algorithms-based trading can gauge such unexpected events and monitor the market levels to trigger trading or investing opportunities.

Inverse Volatility: This strategy is usually used, in combination with markets for exchange-traded funds (ETFs). In this strategy, inverse volatility ETFs are bought to hedge against the volatility risk to the portfolio. Here you can get substantial returns if volatility remains low, as inverse volatility ETF plays on market stability being the prevalent condition.

Risk-On/Risk-Off: This trading strategy works when changes risk tolerance of an investor are observed closely in response to global economic patterns. Under this strategy when risk is considered in the low order then investors bet on high-return investments. However, applying this strategy involves monitoring the various factors that an algorithm can analyse such factors and take decide the risk level in the market is running low or at high levels.

Index Fund Rebalancing: As the name suggests, index funds are linked to benchmark indices, these funds with the defined period but during that, it has to be kept rebalancing to make sure the holdings are aligned with the index. When this happens traders using the algo trading strategy can capitalize on such actions. Algorithms can make quicker decisions than humans rebalancing the trades at a faster speed.