What is algorithmic trading? This article explains algorithmic trading and also includes why the banks use it and how you now can access it for your own benefit? What is an algorithm? How are algorithms used? What impact do algorithms and technology have on our lives? Description: In mathematics and computer science, an algorithm is a step-by-step procedure for calculations. Algorithms are used for calculation, data processing, and automated reasoning. Algorithms are now being used in many aspects of modern life. They are used from everything from designing new drugs and DNA sequencing, to planning the best route for an oil pipeline. Algorithms are here to stay and there are many interesting articles on algorithms and the impact they are having on our lives in today’s society. The interesting question is if the algorithms are so powerful and the math behind them are so complex and so many data points and variables can be encapsulated at one time how as humans do we keep up with the decisions the algorithms are making or recommending? This article is a companion to the Equitimax discusions on trading and trading techniques and no discussion on trading would be complete without a look at algorithms and algorithmic trading. What is algorithmic trading? Algorithmic trading is defined as when organisations and individuals use these calculations to test, model and analyse market data, with the objective to identify specific trading systems that consistently make money and can be automated. The algorithm and technology will identify the trades from the proven trading system, the market condition or price movements actually trigger the individual trades and people use the calculations to automatically identify and place the trades. Some of the technology is all about identification and some is built to aid implementation. How does algorithmic trading work? Typically in the past large banks and financial organisations used their huge budgets to develop teams of IT professionals, who’s research dollar was applied to identifying ways of analysing, tracking, monitoring and trading the financial markets automatically without the aid of a human in the decision making process. The ongoing costs of hiring and funding these long term projects ensured that they remained as projects pursued by large institutions only, until recently when as computer software got smarter and computing power became cheaper and freely available to anyone so the science could then be used by a smart guy with a laptop, which now has more computing power than anyone would require. This image displays below is taken from an earlier article and displays the performance curve of a trading system, which was developed from thousands of other systems and the performance is based on hundreds and hundreds of trades.
Each trading system delivers a different result from each series of trades and the result of the trade sample must sit around the top area of the performance curve as this represents the most stable return while reducing ongoing open ended risk, in short these systems must generate the largest returns while reducing the amount of overall risk as much as possible.
This second image below displays a sample of many systems and these are sorted and reduced to only those systems that deliver the best results across a series of rigorous statistical tests and over a very large sample of trades. The objective is to identify the most consistent trading systems together that deliver the most consistent optimised results. The performance of each system where the statistical measurement of risk to reward and the overall result on the account all sit on top of the performance curves is what our research and analysis is aiming to establish. Basically, how to make the most money, as quickly as possible, with as little risk to the whole portfolio or account. The trading systems should exhibit robust, solid returns, controllable risk and negatively correlated to the other systems in the group.
Small private businesses like Equitimax started to develop these algorithms and began the process of commercialising them and offering them in different product offerings to the investment community. This use of new technology focuses on finding specific ways of creating new dynamic strategies that make money. Those systems that do not meet the profit targets required are
rejected. Those systems that perform above average and therefore sit on the top of the curves are put into the mix so they can be added to the algorithms used on live accounts. These methods manage, control and make money for end users from the analysis of the financial data that is now freely available gives 2ways2wealth systems that work.
For more information on algorithms and insights into the technology used to identify, manage and run the systems on your own personal trading account you can visit www.equitimax.com. Having access to the results from the trading algorithms placed on your trading account automatically, using cutting edge trading technology and todays available computing power, added with new and innovative software programs, has started a technical revolution and is making many of Equitimax customers amazing returns.