Algorithmic Trading Strategies

Arbitrage

The first type of algo trading strategy that we'll talk about is an arbitrage strategy. Arbitrage strategies use price differentials to generate risk free profit. Although these price differentials don't appear often, an algorithm will monitor the market for you. It not only saves time but also executes during the short time window that they're available.

One example of an arbitrage opportunity is a differential appearing between the spot price and a futures/option price for a currency pair.

Trend Following

Another type of popular algorithmic trading strategy is a trend following strategy. Trend following strategies involves algorithms monitoring the market for indicators to execute trades. These trades normally use technical analysis with chart patterns and indicators to make decisions. These algorithms are popular because of their relative ease of design and use compared to other algo trading strategies.

Some of the technical analysis that this strategy might use can be anything from oscillators and indicators, to using moving averages and mean reversion.

Execution Based Strategies

The last type of algorithmic trading strategy is related to execution-based strategies. These are the type of strategies that institutional investors make when executing large quantity orders. These types of strategies use various methods in order to make the most stable purchase possible. For example, you can break up the purchase in terms of volume or time.

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