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Modern exchange trading is full of completely new and unfamiliar terms for most investors: algorithmic trading, a robot for automatic execution of transactions, trading by signals, etc. Just 20 years ago, people worked in the market, relying solely on their own intuition and knowledge, not counting on any outside help. Much has changed today. Smart, fast, and amazingly accurate analytical systems have ascended the podium. They instantly won the hearts of millions of traders around the world. A living person cannot compete with such a machine in endurance, performance, and even speed. So what exactly is algorithmic exchange trading?

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Automatic speculation in the market originated in the 80s of the last century. But in those days, "mere mortals" were far from such technology. It was used by exceptionally large institutional investors who were distinguished by access to serious computing power and intellectual resources. Now this innovation can be used by anyone who has a PC or any other gadget with Internet access.

Today there are two basic definitions that most fully characterize the concept of algorithmic trading:

  • An automatic system that independently opens transactions using the investor's funds. The trader himself, as a rule, does not take part in placing orders. The program operates strictly within the specified algorithm. Such software is called automatic, and also mechanical trading system (abbreviated as ATS and MTS, respectively). In the second option, the trader controls part of the actions. The first version is completely self-contained. It will be enough for a trader to set the settings once, and then, if necessary, withdraw the money earned by the system from the account. The method of work for MTS and ATS can be absolutely the same.
  • The principle of executing a large player's order, in which it is automatically split into smaller parts. Such an order is opened gradually in several stages and according to the rules strictly set initially. A set of instructions usually contains price characteristics, split algorithms, and a number of other parameters that determine the conditions for transferring orders to a broker. The main goal of automating this process is not so much to make a profit as to make the order cheaper for the trader, as well as to reduce the risk of its failure. As practice shows, this technology reduces the impact of large transactions on the market in a global format, since all processes are smooth. Just imagine how long it would have taken to sell 100 shares of the company manually, 1-4 shares. With MTS or ATS, the task is simplified many times over. The most popular algorithms include the following positions: VWASP, Target Close, Implementation, TWAP, Percentage of Volume, Shortfall, Pegged.

To make it easier for you to understand what investors are dealing with now, I will use less complicated words. Algorithmic trading is the automation of all routine processes that constantly accompany trading. You do not have to conduct your own analysis and calculate complex mathematical models. In addition, ATC is a significant time saver and relieves emotional stress and burnout. This has always been almost the main enemy of a successful exchange player. Sometimes, too much excitement thwarted a potentially profitable multi-million dollar trade. Competently configured trading robot never makes a mistake because of fatigue or doubt. He always acts clearly and quickly, according to the laid down algorithm.

Experts believe that algorithmic trading emerged simultaneously with NASDAQ, the first automated exchange trading system. The year 1971 was taken as a starting point.

Of course, new technologies have not always been highly accurate and perfect. In 1987, mechanical trading led to a massive mistake that literally crashed the American stock market. Now all "side effects" have been reduced to zero, so there is no need to be afraid that the robot will drain your precious deposit.

The main form of automated trading is high-frequency trading. All transactions are completed in a split second, which is physically impossible if you work manually. Therefore, I add to the main advantages of mechanical trading systems also the incredible speed of operations.

Modern algorithmic trading: essence and basic principles

algotrading artificial intelligence

Players who have mastered this novelty received the status of quantum investors (quants). They are also called algorithmic traders. Such market participants rely only on the theory of the probability of the price of the selected asset falling into the desired range. Basically, players of the new generation use the automation of all processes completely. But in theory, all this can be done manually. Typically, such investors look for repeating patterns in the past, but with the help of MTS or ATC. The algorithm incorporated into the program detects similarities much faster than the most experienced trader. I can say with confidence that the essence of algorithmic trading lies in the analysis of historical data of the asset under study, as well as in working with special tools that are offered by almost every modern Forex robot... So, experts identify three options for the selection of probable positions:

  • manual: the researcher, using mathematical rules and models, analyzes the historical data on his own;
  • automatic: the same is done with the use of a mechanical assistant, which significantly reduces the procedure time and increases the amount of input data;
  • genetic: all algorithms are developed directly by the software itself, which already has artificial intelligence and the ability to self-learn and improve.

However, you must always remember that even the smartest robot is not a psychic and certainly not a panacea for any loss. The modern market is unpredictable in its movement. Instability in the economy and dangerously fluctuating political background can both bring millions to a literate trader, and outright ruin him. Therefore, knowledge, experience gained and the ability to analyze the stock exchange remain mandatory for every player who wants to achieve a positive result in their activities.

The history of the development of algorithmic trading

So, as I said above, 1971 is considered to be the starting point. But how did events develop further? In 1998, the US Securities Commission (SEC) officially authorized the use of electronic trading platforms. It was then that the real high-tech race began.

In the history of the development of algorithmic exchange trading, it is worth paying attention to the following key points:

  • 2000s: automatic transactions are completed in a few seconds, and the market share of robots is less than 10%;
  • 2009: the speed of order execution is reduced several times and reaches a couple of milliseconds, the share of automated assistants increases sharply to 60%;
  • 2012 and later: the unpredictability of events on the exchange entails massive errors in the rigid algorithms of most software, which leads to a reduction in the volume of automatic transactions to 50% of the total mass (artificial intelligence technology is being developed and implemented).

High-frequency trading is still relevant today. Many routine operations such as scalping the market are carried out automatically, which significantly reduces the trader's workload. However, the machine has not yet been able to completely replace the living human intellect and developed intuition. This is especially true of situations when the volatility on the stock exchange is greatly increased due to the release of economically significant world news. During this period, experts strongly advise against relying on trading robots.

Varieties of algorithms

algorithmic trading variety

In essence, it is a specific set of instructions or rules created to accomplish the assigned tasks. If we mean algorithmic trading, the robot replaces custom algorithms and performs the function of an independent market participant. To write a basic list of rules, information is taken on the execution time of the planned transactions, their volume, as well as the past, current and future prices of the asset.

Algorithmic trading has several basic directions:

  • Automatic hedging. The bottom line is to create a certain set of rules with which a trader can reduce his risks.
  • Direct access to liquidity. The goal is to reduce the cost of connecting to trading platforms, entering the market, as well as creating the highest speed of work in it.
  • Statistical strategy. Here we are talking about the constant search for all kinds of trading options and potentially profitable "loopholes". It is based on statistical analysis of data over time.
  • Algorithmic execution strategy. This technique involves performing specific tasks related to opening and closing trades.
  • High frequency trading. It is characterized by instant formation and execution of orders in a huge amount. Against the background of certain risks, this direction in algorithmic trading has significant advantages.

Despite some similarities, the currency and stock markets differ significantly in the automated trading methods used. Each of them has a lot of nuances. If you want to become a successful investor, then you should definitely not ignore them. Below I will talk about this in more detail.

Features of algorithmic trading in the stock market

Many players call this exchange the real gold mine. It is here that most of the largest investors managed to make their fortune, starting with a minimum deposit, but a fairly voluminous baggage of knowledge and impressive ambitions. The stock market opens up a wide scope for the active use of automatic trading. However, following the observations, algorithmic methods are more common here among large participants (companies), but individuals prefer to trust their own skills and abilities.

Automatic trading within this market has several main ways:

  • Market making. All strategies here are aimed at maintaining the required level of liquidity. This technique is distinguished by its global nature and huge money supply, since we are talking about the most influential market participants. They are called Market Makers. It is these players who, one might say, follow the general order and set the direction of trade. Market makers often turn a blind eye to their own profit, meeting the demand for various instruments. Of course, this is not a question of complete disinterestedness, as these investors receive a certain reward from the exchange itself.
  • Arbitration. This is a rather specific technique based on speculation in financial instruments, the correlation between which is practically zero. A distinctive feature of this direction is the minimum deviation. We are talking about working with futures or stocks of the same company, or the same assets, but in completely different markets. The system monitors price fluctuations for related positions, and then carries out special arbitrage transactions, with the help of which the value is eventually equalized.
  • Pair and basketball trading. This is the opposite technology to the previous direction. It uses two or more instruments with a high percentage of correlation (not equal to one). The logic is that if one asset deviates from a certain course, it is highly likely that in the end it will still return to its group. The main task of the algorithms in this case is to track this kind of movement and make transactions that are profitable on its basis.
  • Front running. Here we are talking about analyzing the volume of trades performed by the instrument used, as well as calculating the most large-scale orders. The algorithm takes into account the holding of the price by a large order and predicts the occurrence of a large number of transactions in the opposite direction. As a result, due to the speed of data analysis, certain fluctuations occur in the tape and the order book, which are caught by the prescribed algorithms. Their main task is to assign small movements. Moreover, this must be done faster than the rest of the participants.
  • Systems based on technical analysis. This implies the use of market inefficiencies, as well as the detection of emerging trends through the use of a number of special tools. Most often, this kind of strategy is aimed at making a profit using classical techniques taken from technical analysis.
  • Volatility trading. Most specialists and stock analysts consider this type of trading the most difficult. In this case, participants work with options, trying to predict the instrument's volatility. Such a game entails huge financial risks, so this investment option is possible only if you have access to high computing power and a whole group of experienced specialists.

Algo trading on Forex

forex algorithmic trading

The foreign exchange market is already practically inhabited by robots. Most of the operations are performed by automated trading advisors that manage to enter the market quickly and accurately, thus bringing fabulous earnings to their owners. Such popularity Forex bots received mainly through the MetaTrader 4 trading platform, which is considered the most functional and advanced to date. The Expert Advisors owe their success to the MQL4 programming language. It is he who makes it possible to master algorithmic trading even for investors with a minimum baggage of professional knowledge. A modern terminal in combination with an adapted programming language received a lot of advantages that immediately won the lion's share of market participants:

  • the trading software written in MQL4 functions perfectly even with low computing power, so a standard PC will be enough for the user;
  • this programming language is quite easy to master even for an ordinary person, so if you wish, you can get a reference book, study the base and write a completely functional trading assistant yourself;
  • programmed advisors are immediately ready for work, so they can be safely implemented in the terminal and tested;
  • MetaTrader 4 is equipped with a wide variety of exchange tools to test the performance of algorithmic software.

If you want to join the ranks of modern currency traders and experience the beauty of automated trading, MT4 and MQL4 will be an excellent opportunity to quickly learn all the subtleties of such a game. In addition, there is a chance to become a real programmer and develop a unique assistant with a full set of necessary functions.

I must say that algorithms are actively used not only by individuals, but also by credit institutions. For example, with their help, banks update their quotes for currency pairs on trading floors. Due to this, all operations are carried out faster and more accurately, since there is no human factor.

Is there a specific Forex robot that experienced investors recommend? Yes, such a program exists, and I can recommend it, since I managed to test this assistant personally. This is an automatic advisor Abi... Reviews about it can be seen on almost every forum dedicated to the issues of currency trading. This software was developed taking into account all the requirements of modern players and has excellent performance (more than 85% of transactions are completed in a plus for the investor). The program is easy to master, so I recommend learning the world of algorithms with Abi.

Creation of robots for automated trading

It all starts with drawing up a plan of tasks that the assistant will perform. Particular attention should be paid to a clear and specific strategy. At this stage, you should understand what exactly you want from your robot and how it needs to work with the market.

Automated software should even take into account the personal preferences of a particular trader, play style and level of knowledge. Since this issue requires a clear understanding of all the subtleties and features of the trading system, it is better to write an algorithm for an experienced programmer with practical knowledge of trading.

To create mechanical advisors, you will need a thorough study of one of the following languages: Python, MQL4, C ++, MathLab, C #, Java, R. With their help, a programmer will be able to create a database that will execute and test systems, quickly eliminate errors that arise (without them anywhere), high-frequency strategies analysis scheme.

It is possible to create basic MTS even without specific skills. Of course, in this case you will not invent a bicycle, but you will be able to write a simple assistant. For these purposes, there are special algorithmic trading platforms: S # .Studio, TSLab, MetaTrader, Multicharts, TradeStation, WhelthLab. With their help, you will gain hands-on experience and better grasp the essence of autonomous trading.

How to learn the basics of algorithmic trading

how to create algorithmic trading

You will not get such knowledge in school circles. This is a very narrow and specific area. It is difficult to point to truly reliable studies here. As a rule, it is on these key points that the strongest emphasis is placed:

  • programming languages;
  • economic modeling;
  • mathematical models;
  • exchange strategies and information about the features of trading instruments (options, futures, shares).

The area under consideration will have to be mastered mainly independently with the help of literature. There are not so many books devoted to algorithmic trading:

  • "Quantum Trade" - E. Chan;
  • Algorithmic Trading and Direct Access to the Exchange - B. Johnson;
  • “Methods and algorithms of financial mathematics” - L. Yu-Dau;
  • “Inside the Black Box” - R. Narang.

Almost all of these books are published in English, but you can find quite decent translations into Russian. Unfortunately, Russia cannot boast of significant work in this area, since robots are much more developed in the West. In addition to books on programming, I also recommend reading literature that reveals the essence of stock speculation and technical analysis in general.

Pros and cons of algorithmic trading

Automatic trading is the exact opposite of manual trading on an exchange. Consequently, all the disadvantages of the latter will be offset by the advantages of the former. Cons of the classic scheme of working in the market:

  • The impossibility to engage in speculation around the clock. We are all living people, because from time to time the head and body need rest, food and sleep.
  • Emotional and psychological stress. The live trader is often gambling. Feelings such as fear and greed are familiar to him. And this is not to mention doubts, which are sometimes more in the head than practical thoughts. Trading can only be profitable if you follow the established rules and discipline. If a player gives in to emotions, then he will not be able to work on the market for a long time.
  • Lack of proper experience in stock analysis. Unfortunately, even before their first earnings, the trader faces huge losses. Many investors admit that they lost more than one deposit before they learned to understand the market properly. And not everyone can afford a large number of fatal mistakes.
  • The influence of personality on the outcome of the trade. Each investor in one way or another shifts his character to the chosen trading method. All players require a personal fully adapted strategy, which significantly complicates the investment process.

All of the disadvantages I have listed are absent in automated trading. If you choose algorithmic trading, the robot assumes all obligations for the execution of transactions. You do not have to sit at the computer for days and be nervous in anticipation of the result of a trading operation. But even this method of earning has a number of disadvantages:

  • Complexity of algorithms and their creation. Perhaps this is the most important disadvantage that prevents absolutely everyone from enjoying the benefits of innovation. It is necessary to be well versed in programming languages ​​and directly exchange trading. Writing an automatic assistant is complex and requires a lot of experience.
  • Risk of error in the source code. Even the slightest inaccuracy can cost the player all of his capital. Moreover, the trader does not always notice the supply at once. Most often, awareness of what happened occurs after a penny remains on the account.
  • Following strict rules. On the one hand, this is good. Rigorous discipline is often lacking in overly emotional traders. But the market is constantly changing and does not stand still. It will be much easier for a living person to adjust to new conditions than a program.
  • Lack of the right information in the right amount. Get ready for the fact that the Internet will not give you a lot of useful books and visual video tutorials. It is difficult to study algorithmic trading precisely because there is very little required information in the public domain. Most likely, you will have to buy special literature and translate it into Russian on your own, since not every publication has a high-quality official duplication in Russia.

As you can see, there is simply no perfect marketplace option. There are advantages and disadvantages everywhere. Even the best performing software can sooner or later give a fatal error that will cost you the loss of funds. History has many illustrative examples, when robots literally in a matter of minutes drained away the largest investment portfolios, thereby seriously undermining the economic stability of the entire world community.

However, there are positive moments when assistants freed up a lot of free time for their owners, giving them the opportunity to develop new successful strategies. And no one has canceled passive income in the background. Therefore, the final choice, of course, is yours. Progress does not stand still, therefore it is quite possible to assume that in the near future traders will be able to entrust their savings to the most real self-learning artificial intelligence.

Risks associated with automated trading

algorithmic trading risks

What is the most dangerous thing when dealing with algorithms? As with any other technique, there are several risky points that must be borne in mind if you decide to trade with robots:

  • Price manipulation. The fact is that the algorithms are quite realistic to configure in such a way that they will pointwise affect individual instruments. And in this case, the consequences can be very dangerous. In 2012, the very first day of trading in BATS Global Markets shares was remembered by traders by the real collapse in the value of the company's securities. In just 9 seconds, it fell from $ 16 to a few cents. As it turned out later, the reason was the operation of a high-frequency trading robot, which was deliberately programmed to reduce the price of shares. Such a trading policy can mislead other players and seriously distort the real situation on the exchange.
  • A sharp jump in volatility. From time to time, all world markets mark an unfounded movement in the value of assets. This can be either a strong rise or a catastrophic fall in prices. This situation is called flash crash. And most often the reason for artificial volatility is the actions of high-frequency robots, since their share in the total mass of market participants is very large.
  • Operational risks. The huge volume of applications arriving at the same time can easily overload even the most powerful server. Therefore, sometimes, at the peak of active trading, the system stops functioning, all movements of funds are suspended, and participants receive significant losses.
  • Decreased predictability of the market. Algorithmic robots have a major impact on exchange pricing. As a result, the accuracy of forecasts is greatly reduced, which undermines the very foundations of fundamental analysis. Moreover, automatic assistants simply deprive the adherents of classic trading of good prices.
  • Increased costs. The abundance of mechanical advisors requires a constant build-up of technical capacity. As a result, the exchange rate policy is changing and certainly not in favor of traders.
  • Outflow of liquidity. If a stressful situation has arisen in the market, many players who use the services of robots suspend trading. Since most of the orders come from automated advisors, the result is a global outflow of liquidity, which immediately collapses all quotes. The consequences of such an exchange "swing" can be very serious. Also, the outflow of liquidity always provokes mass panic, which only exacerbates an already difficult situation.


Exchange trading has huge potential for making money. And for this you do not need to have an initially gigantic investment portfolio. A well-chosen strategy, superbly working intuition and tough discipline make it possible to make a profit for everyone who is tired of working for the benefit of countless bosses. But not always everything depends on the person. Algorithmic trading is a real breakthrough in the field of stock investing. Robots took over almost all the routine work, which previously took a lot of time from people. Today, trading is available to everyone. Even if you are not experienced in market trading, try trust the algorithms. Science has gone far ahead, endowing mechanical assistants with capabilities that significantly exceed human ones. So why not change your life for the better? After all, once having taken a risk, you can stay happy forever.

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