The rise of automated trading algorithms within the financial markets is on the rise more than ever, so much so that 80% of trading on Wall Street is attributed to the algorithmic trading.
Algorithmic trading consists of using statistics, automation, and advanced technologies, to identify investment opportunities, and act on them in an efficient way.
On a fundamental level, algorithmic trading is not too different from what disciplined investors have been doing all along, and that is follow a set of rules. An algorithm is just a combination of rules and variables leading to sets of instructions. Within the context of investing and trading, an algorithm is effectively the means by which a strategy is executed. Things only start to get complicated when you start adding more processes that affect the variables which you observe. An algorithm can be as simple as buying a stock if it’s trading above a certain price level, or more complex when you add elements of psychology, mathematics, and linguistics.
At the end of the day, an algorithm is only as complex as your strategy. Thus, there are clear benefits to using algorithmic trading with an existing investment strategy. Moreover, algorithmic investing tools are more accessible than ever before, and no longer a luxury enjoyed by the cool cats of Wall Street. Here are five ways you can use algorithms with traditional investment strategies, without giving up oversight or control.
1. Improve Asset Discovery with Autoscreening
Investors are constantly searching for new opportunities in the markets. However, we’re often taught not to stray too far from what we know, focusing on the market opportunities most immediate to us. After all, a lot of time and effort goes into researching specific companies, which often results in missed opportunities.
One way of improving your awareness of the market is through autoscreening. Autoscreening is an algorithmic process by which you can specify a set of conditions, and screen the market for matching companies in a reiterative manner. It’s different from simple screening in that it’s repetitive, and constructive. Autoscreening is not only geared towards presenting relevant opportunities, but involves extensive logging, and reflection. It’s an incredibly popular tool used by traditional investors gain awareness of like-companies across different sectors.
2. Read More with Natural Language Processing
It’s important to stay informed of the news related to your portfolio companies, as well as any other potential investments you have in consideration. Unfortunately, with the sheer volume of news surrounding us today, it can be difficult to find relevant information from sources you trust. A natural language processing (NLP) algorithm can easily aggregate thousands of news sources, score them for relevancy, and present you with an easy to read digest of what’s most important.
Moreover, NLP algorithms are able to extract sentiment and to an extent perceive human emotion. This means you stand to gain a better understanding of how other investors may react to incoming information, while saving you a lot of time.
READ: ARTIFICIAL INTELLIGENCE IN TRADING.
3. Automate the Boring Stuff
There are certain tasks within every investor’s due diligence processes that are tedious, require a lot of time, but are still necessary. Processes like:
- Downloading SEC filings.
- Working with large sets of data in Excel.
- Forecasting depreciation.
- Logging trades.
- Keeping track of broker fees and commissions.
- Setting reminders for important events.
… and much more.
These tasks start piling off after some time, and next thing you know you’re two hours into reading guidance that was issued two years ago for a stock that you don’t even own because you mistyped the symbol. Automated trading algorithms are all about efficiency, and automation is an important first step in making sure you’re focused on the things that matter.
4. Get the Price You Want
Algorithmic trading evolved to meet a demand to place faster and more accurate trades. While algorithms in ECNs (electronic communication networks) ensure that our trades make it to the exchange, other companies attempt to exploit the same technology to front-run everyday investors’ trades. It becomes especially difficult to enter large long positions without impacting the price in less-liquid markets.
Automated trading algorithms can give you the advantage of entering positions over a longer period of time, without having to average-up your trades. The algorithm breaks down your penultimate position size into smaller blocks of limit and market orders over a period of time to make sure you enter at the price you need without disrupting the market depth.
5. Modelling Made Easy
One of the biggest advantages of using a trading algorithm is in its ability to perform complex functions on the fly. Financial modelling is an exciting process that many investors enjoy, but isn’t it worth spending more time perfecting your modelling methodology rather than slaving away in Excel? From price-action forecasting, to discount cashflow analysis; an algorithm can reiterate through a list of stocks and output individual reports that make interpretation significantly easier. While most basic modelling algorithms won’t be enough for serious value investors that pour over financial statements for hours, it’s a great step in preparing yourself for the details hidden between the lines.
Automated Trading Algorithms: Bringing it all together
Remember, trading algorithms are a means to executing your strategy, and human-oversight is irreplaceable in investing. Afterall, tenure and experience in the markets counts for a lot, and defines the way you analyse opportunities. However, these five methods – together or apart – will not only save you time, but also allow you process significantly more information that you would otherwise. When combined in a well-developed trading system, investors can leverage these tools to perform other tasks that aren’t mentioned here, but are just as important to the investment cycle. This can include; risk monitoring and management, position sizing, portfolio balancing, compliance and accounting processes, and divestment.
Remi Technologies offers a free consultation and quote to every client, and we work to make sure that your strategic needs are well-accounted for before you commit to a project. The great thing about working with algorithmic investment tools is their modularity, where you can start with only one tool, dipping your toe into the world of algorithmic trading before climbing to the top of the diving board. Afterall, technology exists to serve, and algorithmic trading is no exception.