Algorithmic trading is a method where computers are given commands to follow a certain set of directions for placing traders, has become quite famous in the financial markets.
Mean reversion depends on the hypothesis that costs and returns at last move back towards the mean or normal. .
Arbitrage involves taking advantage of price differences of the same asset in different markets or different forms.
This strategy is a more sophisticated form of arbitrage that involves mathematical modeling. Statistical arbitrage uses statistical and computational methods to identify short-term trading opportunities.
Market making is a strategy where the trader provides liquidity in the markets by buying and selling securities. Algorithms in the market continuously quote buy and sell prices, earning a profit from the spread between these two prices.
Sentiment analysis strategies involve analyzing news, social media, and other textual data to gauge market sentiment and make trading decisions.
A strategy known as high-frequency trading uses algorithms to quickly place a large number of orders. These strategies rely on the speed of execution, often measured in microseconds, to exploit small price gaps or market inefficiencies.
Algorithms can analyze huge amounts of data and execute trades within several seconds. This speed and efficiency can be crucial in taking advantage of market opportunities that may exist for only a brief period.
Algorithmic trading reduces the likelihood of errors that are common in manual trading. Since trades are executed based on pre-set criteria, the chances of mistakes such as incorrect order entries are significantly lowered.
Before implementing them in live markets, algorithmic trading allows traders to backtest strategies using historical data. This ability to test strategies over different market conditions helps in refining them and identifying potential issues.
Algorithmic trading eliminates emotional decision-making from trading activities. Since trades are executed based on predefined rules, no room for emotional responses might lead to irrational decisions.