Last Updated on 11 September, 2023 by Samuelsson
Algorithmic trading is becoming increasingly popular because the prospect of having a computer efficiently execute trades on behalf of a trader is an enticing one. This trading approach is used by many big trading firms, and many retail traders have started using it as well. It’s only proper to want to know if algorithmic trading is hard if you intend to soon adopt the approach.
Yes, algorithmic trading is hard, just like any other trading approach, and you need to put in lots of hours. You should know that trading, as it is presented in mainstream media sites, is quite deceptive. Mastering algorithmic trading requires a lot of hard work.
In this post, we will cover the following:
- What algorithmic trading is
- How it works
- Whether it is worth your effort
- What you need if you wish to adopt an algorithmic trading approach
- How to build an algorithmic trading system
What is algorithmic trading?
Algorithmic trading is a trading approach in which computer algorithms search the markets for trade setups and executes and manages trades for you. In essence, you provide the computer with trading algorithms that are coded with the rules to know when to enter a trade, the right position size, the direction to trade, and when to exit.
These algorithms will then execute the trades for you according to the specified rules. The algorithms are often coded based on specific trading strategies that have been shown to have trading edges in the markets. While there are different trading strategies with varying degrees of complexity, the ones that consist of the simplest conditions tend to work the best.
A trading strategy can be based on any trading idea. For example, a strategy could be to buy once the market makes a 7-day low, and sell once it makes a 7-day high. It could also be indicator dependent, where a certain behavior of the indicator generates a buy or a sell signal. For instance, a 2-period RSI going below 10 could signal a buy, while a rise above 60 could signal a sell. The trading strategy is the core of every algorithmic trader’s business because it is the buying and selling criteria of the strategy that are coded as the computer commands that constitute the trading algorithm.
Basically, algorithmic trading is automated, so algorithmic traders can run multiple trading algorithms based on different strategies at the same time, trading in many different markets and timeframes. This diversification of strategies, markets, and timeframes enables risk spreading — a feat that is hard to accomplish for typical discretionary traders, as they will find it difficult to handle more than a few strategies at a time.
How does algorithmic trading work?
Algorithmic trading works by giving your computer a trade instruction, and it monitors the markets and executes the instructions when conditions are met. The trade instructions are based on any chosen trading strategy that has been proven to work in the past. The trade criteria of the strategy are written as computer codes to create a trading algorithm.
You run the algorithm on your computer, letting it monitor the markets for trade setups that match the trading instructions. When it encounters one, it executes the trade according to the preset parameters — position size and all the rest. But first, you will need to backtest the strategy to be sure it’s profitable in historical data and then employ robustness testing to know if the strategy can perform as well in a real-market environment. If everything ticks well, you can go ahead to run the algo in your normal live trading. If you can’t go through the process of developing your trading algorithm, you may buy from a trustworthy trading bot vendor. However, there are many false trading vendors on the web, so you have to be very vigilant.
To put it all together, in algorithmic trading, the computer runs your trading for you. But it is not that simple. There may be bugs in the codes, making the trading system to malfunction, or your computer power, internet connection, or trading platform may cause glitches. So, you need to monitor your algorithmic trading system from time to time.
Regarding the trading platforms for algorithmic trading, there are many different platforms to choose from, but at the Robust Trader, we mostly use TradeStation, Multicharts, or Amibroker. Beginners will find TradeStation and Multicharts very user-friendly as their coding language is easy to learn.
What makes algorithmic trading hard?
If you want to go about it on your own, algorithmic trading is hard to learn! There is so much contradictory information out there, making it almost impossible to know which one to take seriously, and the fact that much of the information can do more harm than good makes things a lot more difficult for an intending algorithmic trader.
Thus, the best thing you can do is to take a trading course because learning algorithmic trading by yourself is going to take years, but an investment in an algorithmic trading course will pay itself many times over. If you enroll in a good course, you could learn all the important things you need to create your very own algorithmic trading strategies in just a few months.
But it is not just about learning; finding a good trading strategy to use and developing your algo system requires a lot of work. You may have to spend a lot of time in front of the computer in search of new strategies. Financial journals may offer some trading ideas, which you have to rigorously test to see how well they perform.
Despite the difficulties, the process of developing a strategy can be really rewarding and exciting, especially if you already find trading interesting, since you learn new things about the markets and how they work. But if you do not find time to build enough strategies, you can always buy a trading strategy from a trusted vendor.
Whatever the case, nothing is perfect in trading, so there will be some glitches even after developing or getting some great strategies. Definitely, you must try to minimize mistakes and get the best out of your strategies, but just know that certain things may be out of your control. Issues may arise from your computer, power supply, internet connection, or trading platform.
As a beginner, it is very easy to get frustrated when things don’t go as you planned. It could be in the form of rejected orders or anything else. Whatever it is, just know that things will finally fall into place if you keep doing the right things and taking care of any issues that arise as they come. Getting frustrated and angry will never solve any problem. Changing your expectations by accepting the difficulties will save you from a lot of frustration and anger.
But do not get us wrong; automated trading works very well. What we are saying is that it can be very hard as there are many steps to be mastered, and that takes time. As with anything in life, the first period is the hardest to overcome — you’re starting from scratch with nothing or very little resources and experience.
While you want quick solutions, what you will find is that building a portfolio of different strategies to trade will take up to a few years. And even after that, issues still will arise from time to time because nothing is perfect. What hinders most prospective algo traders is their lack of patience and discipline. Algorithmic trading takes time to learn and maintain. The strategies you build will degrade over time, and you may have to build new ones to replace them.
Related reading: How Hard Is Algo Trading?
Is algorithmic trading worth it?
Learning algorithmic trading can be very hard, as many steps have to be mastered, but it is not impossible. While the learning process is hard and laborious, it is definitely worth it. Actually, what hinders many intending algorithmic traders, like other forms of trading, is their lack of discipline and patience.
If you put in the effort needed and push yourself through the first months, you will realize it is not only something you can do but also fun. Down the line, you will be able to reap the rewards of your hard work. The feeling of trading an algorithmic trading strategy that you have developed yourself is truly amazing and will make you want to try out more.
Sure, the early period will be difficult and stressful, but if you manage to withstand the psychological pressure during this period, you will be able to reap the benefits later — both in terms of doing what you love and making profits that are not attainable anywhere else.
While different categories of algorithmic trading may seem hard, bear in mind that other forms of trading are hard too. So, if you love trading, your best bet is algo trading. There will be bumps along the road, but when you come to the stage where you have your first strategy, just know that you have, at least, found yourself a new hobby if not a full-time job.
What you need if you want to become an algorithmic trader
For us, algorithmic trading is simply the best way to trade, but it is not that easy. You don’t just become an algorithmic trader. There are some skills you must have to succeed in the journey — yes, it’s a journey, a hard and torturous one at that. Some of those skills you need include:
- Coding skills: You definitely need to know how to code if you are to develop your algorithms yourself. The programming language to learn depends on the trading platform you intend to use as different platforms use different languages. Tradestation, for example, uses a coding language called “Easylanguage”, which, as the name implies, is very easy. The coding language for Multicharts is called “powerlanguage” but is very similar to TradeStation’s Easylanguage.
- Research skills: You need research skills to be able to search and develop trading ideas, as well as analyzing the results when you backtest your strategies. It sounds like an easy skill to have, but it is not.
- Trading skills: Your trading experience matters. When you know how the financial markets work, you will be able to build your algo system in a way to reflect the realities of the markets. For example, your trading experience will show in your risk management parameters and capital allocation.
- Patience and discipline: Learning the ropes in algorithmic trading takes time. You need lots of patience and discipline not to give up along the line.
Building an algorithmic trading system
Developing your own algorithm trading system is as rewarding as it’s difficult. Not many people can do it. If you can’t do it, you can buy from a trustworthy trading algorithm vendor. But if you want to develop your own, these are the main steps involved:
- Finding good trade ideas: The first step is to search for trading ideas that have been shown to have some merit in the market. You can search the web for ideas; one of the best places is finance journals where academics publish their research work.
- Developing strategies: When you have a worthy trade idea, you need to turn it into a tradable strategy. You achieve this by modifying the idea and writing the criteria for the trade entry, exit, and other special trade management specifications. Do this for every trade idea you want to develop.
- Coding the algorithms: The next thing is to convert your trading strategies into computer algorithms that can execute the instructions. To achieve this, you must know how to code in the language of the trading platform you are using. Write the instructions that tell the computer how to identify a trade setup and what to do when the market behaves in a certain way.
- Testing your algorithms: After creating your algorithms, you have to test them on the historical price action to be sure that there are no bugs and, most importantly, that the strategy performs well. But you don’t just stop there: you have to test the system for robustness. Some of the methods you can use for robustness testing are In Sample And Out Of Sample Testing, Walk Forward Analysis, and Forward Testing.
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.
- 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:
- 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.
- 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.
- 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.
- 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.
- 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.