Last Updated on 13 January, 2021 by Samuelsson

Algo trading is becoming increasingly popular because of the extra freedom it offers, with your computer making your trades for you. Although many traders are adopting this approach, how hard is algo trading?

All trading is hard, and algo trading is by no means an exception. To achieve any meaningful success, you need to put in a lot of hours. Do not be deceived; trading, as it is presented in mainstream media sites, is wrong and misleading. You have to put in the hard work.

In this post, we will cover the following points:

  • What algo trading is about
  • How it works
  • How hard can it be
  • Why you should consider learning it
  • How to set up an algo trading system

What is algo trading about?

Algo trading, the short form for algorithmic trading, is an automated form of trading where the trader runs a trading script on their computers to execute their trades according to their written rules. It is a hands-off approach to trading, which may offer the trader enough free time to do other things, but getting it up and running requires a lot of work.

Unlike in discretionary trading where the trader has to analyze the market, place orders, and close them by themselves, algo trading only requires the trader to set up trading algorithms on their computer, which then scans the markets for trade setups and executes them in line with the instructions in the codes.

While algo trading may seem easy, it is quite difficult to set up and maintain. It requires the algo trader to do a lot of market research to find some trading edges, code algorithms to take advantage of the trading edges, backtest the strategies, test them for robustness, and launch them to trade. But even after setting up the trading algos, the trader has to keep checking the system from time to time to be sure that everything is running fine.

So, algo trading, while being the best trading approach in our opinion, still requires a lot of hard work, especially in the early stage where you have to look for trading edges and develop your strategies from them before going ahead to put them into computer algorithms and test how well they perform both in historical price action and in a real-time market. In essence, you need to learn how to code. While knowing different programming languages may be beneficial to you, for algo trading, you don’t necessarily need to learn all the languages out there. You should only go for the coding language of the trading platform you are using to trade.

Despite the stress and hard work it entails, algo trading is much better than discretionary trading in many respects. With algo trading, you can trade an almost limitless amount of strategies at once. Here, we trade over 100 strategies ourselves across different markets and timeframes to take advantage of the benefits of diversification — reducing risks.

How algo trading works

From our discussion so far, it’s obvious that algo trading requires computer algorithms to work. You have to write a script with trade instructions upon which the computer acts when the conditions are met in the market. That is, the computer script/program/algorithm monitors the specified markets, looking for matching setups.

So the computer script has already been coded to identify a certain market condition based on the strategy the trader wishes to trade. In addition to the criteria for trade entry and exit, the script also has instructions regarding the right position size for each trade.

With all these instructions, the computer monitors the markets for qualifying trade setups and executes the trades accordingly when the right conditions are met. However, before you use a trading algo in live trading, it has to be tested on the historical price action to be sure that it has a true edge in the market. In addition, the script has to undergo a robustness test so that you know how it can perform in real-time market conditions.

Putting it all together, algo trading works by enabling the computer to trade for you based on some preset instructions, the algo system first has to be tested both in historical and real-time price action to rule out bugs and ascertain trading performance. And, even when everything is set up and running smoothly, you will need to monitor your algorithmic trading system from time to time.

In case you can’t go through the process of developing your own trading algo system, you may buy from a trustworthy trading bot vendor. But you have to be careful since there are many false trading vendors out there.

How hard can algo trading be?

As with any other form of trading, algo trading can be very hard to master. It may take you many years to learn algo trading, especially if you want to do it on your own by studying the free information you see on the web. The truth is that the free information you will get online may often be contradictory, and you won’t know which one to follow.

Even when you find reasonable information and start learning, building your own system can be very difficult for a beginner trying to figure things out on his own. Finding the right trading idea with an edge in the market to develop into a tradable strategy is difficult on its own. When you add the coding process, backtesting and the analysis, robustness testing, and monitoring your system after launch, you will see that it is not something you may want to tackle alone. You may get frustrated along the line and want to give up. But it is only with patience and discipline can you persevere and push on because mastering the process can be rewarding.

To make learning algo trading a lot easier and faster, it’s better to take an algo trading course where you will learn the necessary things you need to develop your own algo trading systems. While learning on your own may take several years and you may end up not learning the important things, with a course, you can learn a lot within a few months.

Why is algo trading hard?

It is a well-known fact that algo trading can be very hard, especially for new traders who are still trying to figure out the financial markets and how they work. There are many reasons why algo trading is very hard for new traders, and these are some of them:

  • There is conflicting information about what works: The information out there is contradictory, and some of them are outright detrimental to what you are trying to achieve because they are made by people with no trading experience. The worst thing is that there is no way to know which one is useful unless you are guided by someone with ample experience in algo trading.
  • Finding a worthy trading idea is difficult: These days, the market is more efficient, so it is not easy to find trading edges, unlike before when ordinary moving average crossover can present a good trading edge. It takes a lot of research and testing to find a strategy with an edge in the market.
  • Developing an algo system is a long and tortuous process: Even when you find a trading edge, developing it into a trading strategy and algorithm can be a long process. You will need to define the criteria for trade entry and exit and also specify other trade management parameters. Then you code the algorithm that will instruct the computer to make the trades. After that, you have to test the system on the historical price action of about 10 years and also test it in the real-time market. It is a whole lot of process.
  • You still have to keep maintaining the system: When you have gone through all those processes and developed a trading algo, you will still have to keep checking it to be sure it is still working fine. If it is not working well, you may either modify it or create a new one.

Should I learn algo trading?

It all depends on what you want, but for us, algo trading is the best, no matter how hard it is. After all, all trading forms are hard. All algo trading categories offer a whole lot of benefits over discretionary trading, and these are some of them:

  • You don’t miss a trade setup: One of the main benefits of algo trading is that you don’t get to miss any qualified trade setup because the computer never sleeps. Your algo system is always there whenever the market is open, monitoring the market for trade setups, and whenever any setup that matches the instructions occurs, it executes the trade. Once the system is up and running, it never misses a qualified trade.
  • Algo trading ensures speedy analysis and execution: Apart from not missing trade setups, algo systems are faster in execution. Algos can analyze a variety of parameters and technical indicators in a split second and execute the trades immediately. Human execution can’t match that speed, which is why scalpers often use algo systems.
  • It reduces trading mistakes: With minimal human intervention, algo trading reduces the chances of fat finger errors, where a trader unintentionally and unknowingly enters a trade, or multiple zero errors, where a trader enters a much larger position size than intended. Algo trading ensures maximum accuracy in trade execution.
  • It minimizes the effects of your trading emotions: Perhaps, one of the most important benefits of algo trading is reducing the effects of human emotions in trading. The strategies are coded into algorithms that instruct the computers to execute trades on the trader’s behalf, so there is no room for the trades to be affected by the trader’s emotions. Once the instructions are properly coded, the computer executes the trades automatically, and the trader does not have the option of rethinking and questioning the trade. Trading emotions like fear and greed are kept from influencing the trading actions, provided the trader doesn’t intervene. Thus, things like jumping the guns, chasing trades, not closing a hopeless trade, and others, are out of the question.
  • You know the odds: Before running your algo trading system, you must have first backtested it using historical data, and you may even forward-test it. So, you know the odds of the trade setups generated by the strategy and can plan your capital allocation accordingly. There is no room for guessing.
  • It is easy to diversify: With an algo trading system, you can trade multiple markets with multiple strategies across different timeframes at the same time — something that is not possible with discretionary trading. Your algos scan for trading opportunities across a range of markets, assets, and instruments and then execute the trades simultaneously. In essence, you have an automated method of diversification.

How do I set up an algo trading?

Setting up your own algo trading system can be quite difficult, but you would be happy that you did. You can follow these steps:

  1. Identify good trade ideas: Make your research and find good trade ideas that have some merit: one of the best places to search for ideas is finance journals where academics publish their research work.
  2. Create your strategies: Turn your ideas into tradable strategies by writing the rules for identifying a trade setup. You specify the criteria for a trade entry and exit and also state the right position size for each trade.
  3. Code the strategies into computer algorithms: Next, you code those strategies into computer algorithms. Using the coding language of the trading platform you are using, you convert the rules and criteria of those strategies into executable instructions for your computer so that when the conditions are met in the market, your computer can act accordingly.
  4. Backtest your algorithms: After creating your trading algorithms, backtest them using historical price action to be sure that there are no bugs and, most importantly, that the strategy is profitable.
  5. Forward-test your system: If the results of backtesting are good enough, you can test the system for robustness to be sure that the performance in backtesting wasn’t just from curve fitting. The best robustness test, if you have the time, is forward-testing in the real-time market.


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