Noteworthy Automated Trading Strategies

It is incredibly easy to become an investor these days. If you've got access to an online marketplace and the resources available to begin making trades; congratulations, you’re an investor. But if you want to be successful at investing, that's a different story. Understanding the ins and outs of investment strategies, including how to implement automated trading strategies properly and which markets they're best suited for, is a process that requires a lot of hard work and study.

Some trading approaches tend to be more effective than others. Automated trading, for example, has the potential to provide excellent returns on your investment, assuming you follow a sound strategy. If you're looking to learn some of the best automated trading strategies that have great track records for delivering results, you've come to the right place. Our short guide has everything you need to know about getting started in automated trading, especially when it comes to selecting the right automated trading strategies for you.

What is Automated Trading?

Automated trading is a specific type of trading system. The goal of automated trading is to make it easier for human investors to execute trades faster and more accurately. The trick  — as the name implies — lies in automating each trade. Automated trading takes preprogrammed instructions created by human traders and applies those instructions to live market conditions; allowing trades to occur without human intervention.

Automated trading is all about speed, as computers can sift through market data in the blink of an eye and then make split-second decisions. But one should not mistake speed for effectiveness. The key is to ensure that the instructions that have been programmed into your automated trading system are smart and well-researched. You might be able to program an automated trading system to react in a pre-determined manner, as it comes across market data that triggers its instructions. But the long-term investment returns are still dependent on the quality of the automated trading strategy that has been selected .

Most Popular Types of Automated Trading Strategies 

Several automated trading strategies have stood the test of time and are regularly implemented in live market situations. Some of the most popular include:

Trend Based: Trend-based strategies, often called time-series momentum strategies, have a singular goal: generating profit by betting that asset-price returns in the future will mirror those of the historical returns of that same asset. Trend-based strategies, when broken down even more simply, assume that assets that are increasing in price are likely to continue to do so in the short term, while those that are dropping in value are likely to continue to do so as well. In practice, a trend-based strategy like the "simple moving average crossover" identifies stocks that have short-period moving-average values that surpass its long-period moving-average value as good candidates for purchase. The inverse of this indicates an asset that's a good candidate for sale.

News Based: Many things can influence the volatility, volume, and prices of financial assets. One of those is news, and news-based trading capitalizes on this. Such an automated trading method involves scanning for news articles that are relevant to its market by relying on automated keyword searches. These systems then process the data in these articles, classify its importance by quantifying that data and rely on that analysis to execute trades. If a number of articles indicate an overall positive sentiment about a specific asset, the automated system will typically issue a buy order; if sentiment is neutral it will hold; and if sentiment is negative, it will sell.

Arbitrage: Arbitrage is an excellent risk-aversion strategy, as it involves buying and selling identical assets in different markets. Doing so offers opportunities to turn a profit from sometimes very small differences on asset price between markets, especially in short-term trading. As arbitrage is highly dependent on speed and accuracy, automated trading offers a clear advantage because of its ability to monitor markets closely and make split-second decisions. 

High Frequency: High-frequency trading takes automated trading to the next level. Often used by institutional investors, hedge funds and large investment banks, this automated trading strategy focuses on a high volume of high-speed transactions. The end result is the ability to scan multiple markets in seconds and then execute thousands or even millions of orders at once in order to gain an advantage over human investors that could never match the speed of an automated system. High-frequency trading is typically characterized by large wins on small price changes.

Statistical Arbitrage: A subset of more "traditional" arbitrage strategies, statistical arbitrage is considered even better for short-term trading. It is more data dependent as well, making it an ideal use case for automated trading systems. The difference is that statistical arbitrage looks for trading opportunities that arise from price inefficiencies or price misquotes, which happens in assets that are similar or that are linked together. 

Weighted Average Price: Often considered one of the most efficient automated trading strategies, weighted average price strategy involves calculating more accurate asset prices by using larger data sets with numbers of varying degrees of importance. Each number is multiplied, or "weighted," by a predetermined amount before finally being averaged together. These strategies often rely on weighing numbers by time or by volume. Orders are executed whenever an asset's price is significantly above or below this weighted average.

Index Fund Rebalancing: Investment portfolios often leverage index funds, and each of these individual funds is likewise linked to its benchmark index. These index funds have periods where they rebalance their holdings to bring them in line with the index they're linked to. Whenever this happens, investors can capitalize on price differences by trading index assets while rebalancing occurs. Automated trading systems expedite this process by a major factor.

Mean Reversion: Mean reversion strategies focus on the idea that any asset that reaches a new high or low value will eventually revert to its mean — or average — value after a set period of time. One needs to figure out the timing for when a mean reversion is about to happen, and automated trading systems can be programmed to look for the telltale signs of such a reversion by comparing historical data to live market information. Then, these systems can execute buy or sell orders accordingly.

Market Timing: Market timing involves making buy or sell orders on a financial market by predicting when the market as a whole will go up or down. Getting your timing right creates opportunities to make trades that capitalize on the direction of the market to create a profit. Predictive methods to guide market timing decisions rely closely on analyzing the type of market data that automated trading systems excel at doing.

Using Composer for Automated Trading Because automated trading systems require the ability to program those systems with advanced instructions, it's not necessarily easy for new traders to use these strategies. That's why there are trading platforms out there that can help make this process easier thanks to their integrated tools. Composer is one of these platforms. 

Composer's no-code solution makes it easy for traders with little to no programming knowledge to begin using automated trading. This means traders don't need to devote time and resources to either learning how to program an automated system or hiring a programmer who already has that knowledge and expertise. This makes automated trading much more accessible to beginner human traders or those who are still learning.

The automated trading strategies we've outlined above are all viable in their own ways — especially when leveraged with a smart automated trading system. If you want to learn more about how you can start using automated trading strategies in your own investments both quickly and easily, sign up for a free trial of Composer today!