5 Tips for Creating Effective Trading Algorithms – Introduction

One of my best finance books is Flash Crash by Michael Lewis. The book talks about High Frequency Trading (HFT) and how it has become popular in the investment world. Today, most money managers are turning to algorithms to trade. They prefer algorithms because they are fast, accurate, and more dependable. Firms also prefer algorithms than humans because they are relatively cheap to maintain. In this article, I will look at the key tips for creating effective algorithms for your quant trading.

Take time to learn

You should always take time to learn. If you have no background in trading and software development, you should take time to learn. Read books, watch videos, and talk to someone who has a history of developing these algorithms. By doing this, you will have quality information that will help you become a better developer. Luckily, there are many books and websites on how to create algorithms. Also, today, you don’t need to understand programming languages like MATLAB. Trading companies give you a drag and drop platform to help you develop the algorithms.

Use technical indicators you know

Creating algorithms for trading requires combining indicators with certain commands. There are hundreds of technical indicators. You should only use technical indicators that you know well. If you have not used a certain indicator in the past, you should not use it. Fortunately, you don’t have to use too many indicators. You can combine just three indicators and you will have a winning algorithm. The most common algorithms are the Relative Strength Index, Moving Averages, Stochastics, MACD, and the Relative Vigor Index. You should try as much as possible to avoid unknown indicators that are not used in the large investment community.

Consult an expert

Another thing you should do is to consult an expert. This should be someone who has been creating algorithms for a long time. He should have a good reputation of being a successful developer also. The benefit of consulting such a person is that he will give you his opinions about the algorithms you create. He will also help you remove or add features to your algorithms. The expert you consult should be dependable. He should also help you with a clean heart.

Backtest the algorithms

This is one of the most important things you should do when creating trading algorithms. An algorithm that is not tested well is destined to fail you. Remember that no algorithm is always perfect. However, the more you test your algorithm the better it is for you. Testing will help identify errors that are in your algorithm. Luckily, there are backtesting technologies that help you to test the algorithm using the vast amount of data available.

Review it regularly

As mentioned, there is no algorithm that is perfect. A simple line of code can lead to significant losses in your trades. To prevent the algorithm from messing you, you should do your best to review the algorithm regularly. Look at the parameters to identify changes. Also, look at the performance of the algorithm over time and identify any discrepancy. By doing this, you will be able to identify errors and fix them before the algorithm messes you up.

5 Tips for Creating Effective Trading Algorithms – Useful links:



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