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What is Algo Trading and How to Get Started

What is algorithmic trading? Algorithmic trading means that you have a code or a certain algorithm doing the trades on your behalf. You don’t have to manually follow the prices and execute the traders yourself; the computer is doing them for you. It is pretty much automated trading, after you have set everything up.

Algo trading combines the two worlds: Finance and Computer Science. You will need at least some basic knowledge of both of those if you want to get started with algo-trading. In this post, we will go through the benefits of algo trading as well as the negatives.

We will also go through some things on how you can get started with algo-trading. Let’s begin.

Algorithmic trading benefits

Algo trading gives you a lot of freedom compared to normal day trading where you follow the charts yourself and take the trades manually. That is the first benefit you get if you start doing algo trading.

The second benefit is that you it removes the “human error” from trading. Let me explain. Most of the time, traders don’t fail because they have a bad strategy. They fail because they disobey their own rules and don’t stick to their stop losses. Trading is a highly mental game; you need to have a high stress tolerance.

When you have a machine doing the trades for you, you remove the possibility for human error. The computer doing the trades doesn’t have feelings. It doesn’t care to take a huge loss. This is a good thing, if you have a good strategy for your machine, it doesn’t have the room for human error.

Algorithmic trading downsides

The downsides of algo trading is that is can be very difficult to get started with. Even if you already were day trading at some level, learning to code and use the different softwares to create your first algorithm for trading can be very difficult and take a lot of time.

Another downside is that your strategy has to be perfect. The machine doesn’t watch the overall market conditions, unless you have implemented that in the code the machine is executing. You can’t use your “gut feelings”, the machine does what it is told to do.

There is also the fact that not all trading platforms allow or have the possibility to use algo trading. You need to find an exchange that provides the possibility to execute trades with, for example, Python coded bots.

Python trading

One option to get started with algo-trading is to code a trading bot with Python. If you don’t have any experience with coding, it can be a bit difficult to get started. However, the good thing is that Python is probably the easiest programming language out there.

You could also hire someone from Fiverr or Upwork to do some basic trading code for you that you can modify. You just need to give them exact guidelines on when you want the bot to take trades and when to exit.

More information about how to use Python in your algo trading can be found from a good YouTube channel that I used when I tried algo trading in the first place. The YouTube channel is called Part Time Larry. The link is here.

How to make a trading algorithm

To make a trading algorithm you need a few things:

First is the trading strategy. It doesn’t have to be anything fancy at the beginning. You can start with basic trend following strategies. One example being turtle trading strategy.

Platform to execute the trades, meaning the broker or exchange where you buy and sell your positions.

Platform to create the trading bot, can be done with Python, for example

Computer or server to run the strategy from, you can start by running it from your own computer, but if you plan on leaving it on for weeks, you could get something else than your personal computer.

Combine all the things above and you should have yourself an automated trading system.

How to start algo trading

To start with algo trading, you could determine what you want to trade with it. If you want to trade cryptos, look at what you need for a crypto trading algorithm. For forex or stocks, you might need some different kind of software.

After you have determined what you want to trade with algos, find out what you need to get started. One place to get information is Part Time Larry’s YouTube channel that I mentioned above. Another good place is r/algotrading in Reddit. Link here.

Remember to backtest your strategies before you start trading with real money. Checklist to go by below.

  1. Backtest with paper trading, if successful continue to 2.
  2. Test with small amounts of real money, if successful continue to 3.
  3. Rise the stakes to a level that you feel comfortable with.

Like everything else, algorithmic trading takes time to learn and master. Don’t expect to make a trading bot that brings in 500% daily returns in one day. That is not realistic. You can start the journey of algo trading as a hobby at first. It can be fun to learn to automate your trading process, even if you didn’t manage to make it profitable.

Final words

Like everything, algorithmic trading comes with its own sets of risks. There is no guarantee of return. However, you can get started with literally no money at all and see if it is your thing to do. Learn to create the programs and backtest with paper trading.

The only thing you risk this way is your time, but even so, you learned something new that might be useful one day.

Hopefully this was helpful. I cannot give you all the answers, but I hope I can point you in the right direction to find out more about the topic you are interested in.

Other day-trading related posts can be found here.

Have a nice day.

This is not financial or investing advice. Some estimates say that 95% of day traders lose money. Always do your research before risking your hard-earned money.