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Algo Trading – The Best Algorithmic Trading Platforms for 2020

Algo trading or automated trading is a popular way to supplement your trading strategy. In this guide, we'll explain what algorithm trading is and which platforms have the best functionality.
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Author: Adam Green

Last Updated: May 14, 2020
Best ECN Trading Platforms in 2020
Best ECN Trading Platforms in 2020

Whether you are a beginner or advanced trader, using an automated system to help manage your portfolio of investments is invaluable. No trader can be aware of all market changes as they happen, which is where algorithmic trading can really help.

Like every investing strategy, algorithmic trading also has its pros and cons. Some regulators have been wary of algorithm trading as it can have a negative impact on financial stability especially at times when stock markets are falling, but this is not to say that there isn’t a place for algorithm trading. The technology should be used in conjunction with active management to complement your trading strategy, and in this article, we tell you how.

Read on to find a full breakdown of what algorithm trading is, how to start trading, and which providers have the functionality to help take your trading positions further.

On this Page:

    How to Get Started with Algorithmic Trading in 3 Steps

    Step 1: Open an Account

    eToro Logo

    Open a free trading account with our recommended broker. You would have to complete the KYC process as part of the account opening process.

    Step 2: Deposit Funds

    Trading Wallet

    Once you have completed the registration and your account has been approved, you can transfer funds to your account by one of the provided payment methods.

    Step 3: Start Trading

    Open a trading account

    Once you have opened the account and finalized the strategy, you are ready to trade. You can also trade on a demo account to familiarize yourself with algorithmic trading.

    There are several brokers who provide algorithmic trading strategies. We have provided a list of reputable brokers for you to consider for algorithm trading. We have broken out the list to showcase providers that offer forex, cryptocurrency, and stocks:

    • eToro is exceptional for cryptocurrencies
    • Forex.com is a good broker if you want to trade in forex
    • Stash Invest is a great platform for stock trading

    Criteria used to pick our algorithmic trading sites?

    Our review provider reviews are based upon the following factors:

    • Broker’s Reputation,
    • Availability of different strategies
    • Charges and Fees
    • trading platform functionality

    Step 1: Open a Trading Account for Algo Trading

    The first step towards algorithm trading is to open a trading account with a broker that has algorithmic trading strategies. We have provided a list of reputable brokers for you to choose from depending on the type of trading you wish to get involved in. eToro is great for Cryptocurrency, Forex.com has a specialism in Forex, Cryptorocket covers multiple disciplines and Stash is an exceptional stock trading app.

    1. eToro- Good Platform for Traders

    eToro is a reputable broker and allows US-based investors to trade cryptocurrency. If you are based in Europe you can also trade in stocks, indices, ETFs, commodities, and forex. It does not charge a fee for deposits but there is a $5 charge for every withdrawal and the minimum withdrawal is $30. It also charges overnight and weekend fees for CFD positions. eToro is regulated by the Financial Conduct Authority (FCA). It has five cryptocurrencies on its platform.

    eToro provides automated social trading through its trademarked CopyPortfolios. It provides three types of CopyPortfolio.

    • Top Trader CopyPortfolios: As the name suggests, this is based on the top traders on eToro platform. If you are a savvy trader and consistently earn good returns with low risk on eToro platform, you could also be eligible for eToro’s Popular Investor program. You can share your knowledge with other investors on the platform and earn perks in the bargain.
    • Market CopyPortfolios: It combines different assets based on a specific strategy
    • Partner CopyPortfolios: eToro also provides readymade algorithmic strategies.

    These algorithms are developed by leading financial services companies.

    • Allows social trading
    • Multiple automated trading strategies
    • If you are an experienced trader, you can earn perks by sharing your knowledge
    • Charges overnight fees
    • Charges a fee for withdrawals
    75% of investors lose money when trading CFDs.

    4. Stash Invest- Good Platform for Beginners

    Stash Invest is SEC registered investment advisor. The account has several safety measures like 256-bit encryption and biometric recognition. It lets you automate your investing. You can specify how much money you intend to automatically transfer to your Stash account. You can also specify whether you want the money to be invested in stocks or ETFs. It offers Auto-Stash through which you can program how much money you want to invest. It also offers Smart-Stash that lets you save the spare cash in your account. You can trade in stocks and ETFs on the Stash Invest platform.

    Stash Invest provides several other investing services as well. It also has banking, retirement, custodial, and personal investing services. It offers a bank account where you can get your pay from your employer two days in advance. Stash Invest also gives a $50 bonus deposit to invest if you transfer $300 within 30 days. The functionality of automated investments is especially beneficial for those who find it troublesome to save and invest on a regular basis.

    • SEC registered
    • Lets you plan your investments in an automated way
    • Limited financial assets
    • Does not have any readymade automated trading strategy

    Step 2: Learn More About Algorithmic Trading

    An algorithm is a set of instructions that are aimed at solving a problem. Generally, human intervention is limited once the algorithm is set. Borrowing the analogy to trading, algorithmic trading aims to limit human intervention in trading. Algorithmic trading is also known as algorithm trading, black-box trading, and automated trading.

    In simple terms, algorithmic trading automates a trading strategy. So instead of you placing an order, the algo places the order. It reduces human intervention and brings efficiency in trading. There are basically five steps in algorithmic trading.

    First and foremost, you need to have a trading strategy. The trading strategy can either be built on technical analysis of fundamental analysis. Algorithmic trading largely involves technical analysis. Once you have identified the trading strategy you also need to backtest the results.

    If the back-testing results indicate that the strategy can yield positive returns, we get to the third step which is building the algorithm. In the third step, we build the algorithm and automate our trading strategy. In the fourth step, you do live trades through the algorithm.

    While algorithm trades do not need human intervention and the trade would be opened and closed automatically, it does not mean that you need not monitor the trades and the algorithm model itself. There have been instances when uncontrolled algorithm trades have created ripples across financial markets.

    Also, the trading strategy that you employed might also need fine-tuning later. The fifth step would be to monitor your trades as well as the algorithmic trading model.

    What are the pros and cons of using algo trading?

    Pros

    • Reduce emotions in investing
    • Trades get executed faster and at better prices
    • Reduces trading costs
    • Adds discipline to your trading strategy
    • You can backtest your trading strategy

    Cons

    • Technical snags
    • Backtesting may not work in future
    • Can magnify or even cause flash crashes in asset prices
    • Despite the trade being automated, you still need to monitor the trading

    Step 3: Choose an Algorithmic Trading Strategy

    You can deploy any strategy in algorithmic trading. We’ll list down some of the widely followed trading strategies.

    Moving averages

    Some traders use moving average and moving average crossover as an indicator of buy and sell. On a simple level, we can have a price crossover. Whenever a security’s price rises above or below a moving average, it indicates a possible trend reversal. There are also variants and we can have a crossover of two moving averages. There are two main moving average crossover strategies.

    • Golden cross: When the short term moving average crosses above the long-term moving average, it indicates bullishness and a buy signal. Typically, the 50-day simple moving average is used for the short term and a 200-day moving average for the long term.
    • Death cross: A death cross is the opposite of the golden cross. When the 50-day simple moving average falls below the 200-day moving average, it is known as a death cross. Traders see the death cross as a bearish indicator.

    Relative Strength Index (RSI)

    RSI is an indicator of momentum. The value can vary between 0 and 100. RSI values below 30 indicate that the security is oversold. On the other hand, an RSI above 70 indicates overbought positions. You can use the RSI for any number of days but generally, the convention is to use the 14-day RSI.

    Moving Average Convergence Divergence (MACD)

    MACD is the differential between the 12-day exponential moving average and 26-day exponential moving average. Positive MACD values indicate a positive momentum while negative MACD values indicate downside momentum.

    Put call ratio (PCR)

    The PCR ratio is simply the number of put options divided by the number of call options. We can also analyze PCR ratios at different strike prices. Generally, traders see PCR ratio of more than 0.7 as an indicator of bearishness and ratios below 0.5 as a bullish indicator. However, some traders see PCR ratio as a contra signal.

    Support and resistance levels

    In simple terms, support is a level at which there is significant buying interest in a stock price. Support and resistance prices are not static and keep on changing. Various tools including moving averages can be used to determine a security’s support and resistance levels. Based on their analysis, different traders can have different support and resistance level. Also, there can be multiple resistance and support levels for one security.

    • Support level: Many times, stock prices rise after hitting the support price. The basic idea is that as the stock price falls, it becomes attractive for some investors. While a security price can bounce back from the support levels, it can even fall below the support price. Security price falling below the support line is a bearish indicator. However, the support level becomes a resistance once the security’s price falls below it.
    • Resistance level: This is the price at which the security falls amid selling pressure. As the security’s price rises, many investors book profits and we see substantial selling prices at the resistance level. However, if the security’s price comfortably rises above the resistance level, the roles reverse and resistance level becomes the support level.

    Step 4: Open an Algorithmic Trading Account

    1. First and foremost, you have to open a trading account with the broker of your choice. In this example, we show the process of signing up to eToro. Account opening involves the typical KYC (know your client) norms and requires personal documentation to prove who you are, and your suitability to trade. Once you open the account you can then transfer the funds and then you are ready to trade.

     

    eToro Interface - home page

     

    2. After transferring funds, you can log into the account and click on ‘Invest in CopyPortfolios.’  You can choose from Top Trader Portfolios, Market Portfolios, and Partner Portfolios. You can see the creator of the portfolio, their last 12 month returns, and the risk rating on the trading platform.

     

    screengrab of eToro portfolio performance page

     

    3. If you need more information about a particular strategy, you can explore within the platform, which has a detailed knowledge bank. It tells you about the methodology, portfolio, allocation, and various data points related to performance. It also tells you about the maximum daily loss with the strategy.

    Additionally, there is a useful feature to help you gauge the strategy’s popularity. You can see how many of your fellow investors have invested in the strategy, how many new investors subscribed and the range of assets of each strategy.

     

    Invest with eToro - Learnbonds

     

    4. Once you decide on the trading strategy that you want to follow, you need to decide on the amount that you wish to allocate. You can also place a request to stop trading if the value of your investments falls below your pre-set threshold.

    Conclusion

    Automated trading has been gaining in popularity due to its multiple advantages. If you are technically savvy and have a trading strategy, you can build your own algorithms. For everyone else, you can use custom algorithms provided by leading brokers to help make your portfolio more profitable.

    To conclude, always remember that your algorithm will only follow the strategy and place trades on your behalf without the context of market information, human intervention is still required.

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    FAQ’s

    Why should I use algorithmic trading?

    Algorithmic trading helps you automate your trading strategy. It helps trades get executed faster and at better prices.

    Can algorithmic trading models be only built on technical analysis?

    It’s not necessary to build the algorithm on technical analysis. That said, almost all of the algorithmic trading models are built on one or the other technical parameter. However, you can devise a fundamental investing strategy and build an algorithmic model around it.

    How does technical analysis work?

    Technical analysis predicts a security’s future price action based on past price movements. It revolves around three key principles. The first principle says that current stock prices reflect all information. Second, security prices move in a trend. Finally, history repeats itself.

    Can there be a disconnect between fundamental analysis and technical analysis

    There can be a disconnect between your assessment of a security based on technical and fundamental analysis. Generally, technical analysis would give a buy signal if the stock is rising and a sell signal if the stock is in a falling trend. However, the results might vary according to fundamental analysis and a fall in a stock price might signal a buy and vice versa.

    What is a flash crash?

    A sudden fall in asset prices is termed as a flash crash. While algorithmic trading may or may not cause a flash crash, they amplify the crash. A large part of trading today some from automated trading. The fall in stock prices can trigger automated sell orders and only adds to the crash.

    Can I use algorithmic trading only in the stock market?

    You can use algorithmic trading in any security that trades. Stock market, bonds, forex, cryptocurrencies are some of the assets where you can deploy automated trading strategies.

    See our range of trading resources

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    All trading carries risk. Views expressed are those of the writers only. Past performance is no guarantee of future results. The opinions expressed in this Site do not constitute investment advice and independent financial advice should be sought where appropriate. This website is free for you to use but we may receive commission from the companies we feature on this site.
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    Adam Green is an experienced writer and fintech enthusiast. He he worked with LearnBonds.com since 2019 and covers a range of areas including: personal finance, savings, bonds and taxes.