Algorithm Trading: Benefits & Risks

Algorithm trading (also called as Black Box Trading) is very advanced & sophisticated trading mechanism which uses complex mathematical formulas & models to make quick decisions & transactions in financial markets.

According to Technavio, market research Company, algorithm trading is expected to grow at a CAGR of 10.3% globally by 2020. Traditional broking firms and investment institutions are building tech savvy algorithm platforms to compete in the global market. Apart
from the profits, algorithm trading is providing market intelligence which is helpful to take long term trading decisions.

There are no specific rules for developing algorithms, they evolve like the nature does.

How Institutions are doing Algorithm Trading:
There are various algorithm trading strategies implemented by big trading firms and institutional brokers to take the advantage of technology in executing speedy and secure transactions. Below are some of those strategies.

1) Using Google Trends to quantify the trading behavior: Most of the advanced trading algorithms predicts the future stock prices using the past trading analysis. But the recent studies conducted by Nature Scientific Reports indicated that Google
& Wikipedia searches can be used in trading algorithms during information gathering phase. Using this, weekly/monthly average and moving average for a particular term (e.g. Loans by Private Banks) can be measured to buy/hold/sell/re-buy stocks for that period.

2) Mean Reversion: Mean reversion theory states that the prices of stocks (low & high) converge to their mean value over time. So Algo traders identify the price ranges and execute the orders automatically if the price moves out of the defined range.
The simple strategy is to sell high performing stocks & buy low performing stocks if they are outside the mean value.

3) Arbitrage:  Buying a stock in one market at lower price and selling it in other market at a higher price where the same stock is listed in…

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