How to Learn Algorithmic Trading: A Beginner's Guide

New technologies have made investing quicker, easier, and more accessible than ever before, and as a result, more people are now involved in trading strategies that were once closed off to non-professionals. As a result, methods such as algorithmic trading have captured the public's imagination and have been growing rapidly recently.

But what is algorithmic trading? Why is it so popular? Is this something anyone can do, or does it require extensive learning and study? The truth is that just about anyone can go from a beginner in algorithmic trading to an expert — provided you understand the fundamentals and employ the right tools.

What is Algorithmic Trading? 

Algorithmic trading is a type of short-term financial investment that relies on the use of preprogrammed trading strategies. These trading strategies, or algorithms, are complex pieces of programming that are based on pre-established rules of behavior, which are then used to analyze an investment market. Then, in conjunction with that analysis, these algorithms allow traders to make automated buy and sell decisions based on how that analysis interacts with its preprogrammed rules.

Algorithmic trading is often used to implement ultra-short-term investment strategies. Intraday trading, with many small transactions happening in quick succession, is one arena where algorithmic trading excels because this type of activity can occur rapidly, facilitating dozens or even hundreds of transactions over the course of a few hours. In addition, algorithmic trading can be used in longer-term investment strategies, systematically applying preprogrammed logic to portfolios over weeks, months, and even years.

The Benefits of Algorithmic Trading

Despite all its attractions, algorithmic trading isn't a skill you can pick up overnight. There's a steep learning curve (more on that later), and, as a result, it's often considered a type of trading that has a moderately high barrier to entry. Without access to the right skills and tools, algorithmic trading isn't possible — and without access to the right strategic approaches, algorithmic trading might not be profitable.

So what are the benefits of learning algorithmic trading in the first place? Is it even worth the effort to learn? 

When executed properly, algorithmic trading offers several advantages: 

• It can execute trades quickly

• It reduces or nearly eliminates the chances of manual errors or mistakes made by human traders

• Because of its rules-based approach, it has the potential to eliminate psychological and emotional factors in trading 

• And each individual algorithm can be backtested against historical data to ensure it is working properly 

Taken together, algorithmic trading offers a much more systematic and logic-based approach to trading that can be quite effective.

The Skills Needed for Algorithmic Trading

If algorithmic trading sounds like something you want to learn more about, it's useful to have a game plan. You’ll need to possess or develop three basic skills to excel in this trading style: quantitative analysis, financial market knowledge, and programming. Let's look at each of these.

Quantitative analysis

An approach that places emphasis on mathematical and statistical analysis for determining a financial asset's value, quantitative analysis relies heavily on different types of data for predictive modeling. Quantitative analysis combines looking through historical data sets for trends and patterns and then creating computer models based on that data. The goal is to identify the most profitable entry and exit points for investing in specific assets, as well as the expected risk level and the expected level of return. 

Knowledge of financial markets

This is something no investor should be without. Knowledge of the financial markets you're looking to invest in is crucial to your success. This is especially relevant for algorithmic trading, as non-quantifiable events and conditions that aren't part of your quantitative analysis efforts can still impact asset prices. Therefore, you'll need a working knowledge of what types of conditions can influence the market and how.

Programming skills

Last but not least, any successful algorithmic trader needs access to specific training in computer programming. This is because, at their most basic, algorithms are simply lists of instructions coded into a software program. These programs need to be written in a programming language like Python and then rigorously tested before putting them to work under live market conditions. If you don't have access to this knowledge directly, you'll need to either learn it or find a trusted source who can provide you with the types of algorithms you're looking for.

Related: Easy Trading Algorithms for Beginners >

Whether you're simply interested in learning more about algorithmic trading or you're ready to begin teaching yourself in earnest, your best bet is to find some quality books on the subject. A good place to start is “Quantitative Trading” by Ernest P. Chan and “Inside the Black Box” by Rishi K. Narang, both of which are some of the best books on algo trading you'll find anywhere. 

Besides published books, there is a vast repository of knowledge and training available online for anyone interested in teaching themselves the finer points of algorithmic trading. Online courses like Algorithmic Trading 101 by AlgoTrading101 and Algorithmic Trading Strategies by Experfy are excellent places to look. Additionally, bloggers like QuantInsti, QuantStart and Quantocracy are also highly valuable resources for learning more about what trading strategies work and what don’t.

Using Composer for Algo Trading

Maybe you're not ready to go pro just yet. Perhaps you're still learning Python, and you don't want to put your computer programming skills to the test in a live situation. Maybe you want a taste of algo trading, but you feel more comfortable using strategies that have already been tested and shown to be effective.

Thankfully, there are ways that you can still participate in algo trading without having to rely on your own skills and expertise just yet. Using a platform like Composer is often ideal in such situations, thanks to it being a no-coding platform. In this way, Composer offers opportunities to begin algorithmic trading quickly, easily, and with built tools for automated trading.

As a short-term trading strategy, algorithmic investing has exhibited meteoric growth over the past few years. Thanks to the speed and power of modern computing, algo trading offers new opportunities for investors to capitalize on market movements. As trading algorithms grow more advanced and effective, the allure of algorithmic trading is likely to continue to grow.