Best Types of Algorithmic Trading Systems

Investors are constantly on the lookout for new investment strategies that take the guesswork out of an investment. They want it to be a high-yielding, low stress approach; one that minimizes risks and maximizes profits on every deal. Algorithmic trading systems were developed along these lines. “Algorithmic” sounds like a heavy term to digest, but it is not. We will give you a brief overview of algorithmic trading and its varied types.

What is an Algorithmic Trading System?

The term automated trading is used interchangeably for Algorithmic trading. However, the two are different concepts. The latter is a subset of the former. Algorithmic trading is defined as the use of advanced mathematical tools to make important transactional decisions in the financial market. This system relies heavily on computer models to make trades. Based on the prevailing market conditions it decides whether to buy, hold or sell a position.

It splits a large trade into multiple orders in order to reduce market impact.

Algo-trading is generally used by large institutional investors. Many hedge funds and banks have built their own algorithmic trading systems. These systems are complex and they vary from one broker to another. It is also known by some as black box trading and algo-trading. There are many Algorithmic Trading Systems for individual traders and investors available online.

The algorithmic systems have several advantages to an investor. It involves minimum human intervention. It is technology driven and hence offers a higher level of accuracy. It is automated and capitalizes on every possible opportunity that arises in the market. It is prompt and spots high probability opportunities even before a trader couple ever spot and reaction to a setup. It has greater benefits for large institutions because they deal in a large amount of volume each day which requires accumulation and distribution to avoid moving the market bid and ask price.

There is another term that is very popular on Wall Street. It is High-Frequency trading. High-frequency trading is a subset of algorithmic trading. It is used to refer to short term trades. It is an electronic platform that trades large volumes at very high speeds.

Types of Algorithmic Strategies

Algorithmic trading systems are categorized into different types based on the functions they perform. Listed below are the major types.

1. Trade Executions Algorithms:

This strategy is applied to minimize price impact when executing trades. It breaks up trades of large volumes into smaller orders and releases them slowly into the market.

2. Strategy Implementation Algorithms:

This strategy reads and relays on real-time market information. It formulates automated trading signals to be implemented by a trade execution platform. It also involves rebalancing portfolios and searching for arbitrage opportunities.

3. Gaming and Stealth Algorithms:

It is specially created to take advantage of price fluctuations arising out of large trades.

4. Electronic Market Making:

It is also known as passive rebate arbitrage. This liquidity-providing strategy imitates the role of traditional market makers.

5. Statistical Arbitrage:

This is a quantitative approach to equity trading. It developed out of the simpler “pairs trade strategy”. Unlike the pairs trade strategy that compares and contrasts a pair of investments, Statistical Arbitrage tries to correlate hundreds or more stocks including long and short ones.

Bitcoin Thrives Against All Odds

Since it’s currently en vogue right now, I’d like to announce that I’m launching my own cryptocurrency next week.

Let’s call it “kingcoin.”

Nah, that’s too self-serving.

How about “muttcoin”? I’ve always had a soft spot for mixed breeds.

Yeah, that’s perfect – everybody loves dogs.

This is going to be the biggest thing since fidget spinners.

Congrats! Everyone reading this is going to receive one muttcoin when my new coin launches next week.

I’m going to evenly distribute 1 million muttcoins. Feel free to spend them wherever you like (or wherever anyone will accept them!).

What’s that? The cashier at Target said they wouldn’t accept our muttcoin?

Tell those doubters that muttcoin has scarcity value – there will only ever be 1 million muttcoins in existence. On top of that, it’s backed by the full faith and credit of my desktop computer’s 8 GB of RAM.

Also, remind them that a decade ago, a bitcoin couldn’t even buy you a pack of chewing gum. Now one bitcoin can buy a lifetime supply.

And, like bitcoin, you can store muttcoin safely offline away from hackers and thieves.

It’s basically an exact replica of bitcoin’s properties. Muttcoin has a decentralized ledger with impossible-to-crack cryptography, and all transactions are immutable.

Still not convinced our muttcoins will be worth billions in the future?

Well, it’s understandable. The fact is, launching a new cryptocurrency is much harder than it appears, if not downright impossible.

That’s why I believe bitcoin has reached these heights against all odds. And because of its unique user network, it will continue to do so.

Sure, there have been setbacks. But each of these setbacks has eventually resulted in higher prices. The recent 60% plunge will be no different.

The Miracle of Bitcoin

Bitcoin’s success rests in its ability to create a global network of users who are either willing to transact with it now or store it for later. Future prices will be determined by the pace that the network grows.

Even in the face of wild price swings, bitcoin adoption continues to grow at an exponential rate. There are now 23 million wallets open globally, chasing 21 million bitcoins. In a few years, the number of wallets can rise to include the 5 billion people on the planet connected to the internet.

Sometimes the new crypto converts’ motivation was speculative; other times they were seeking a store of value away from their own domestic currency. In the last year, new applications such as Coinbase have made it even easier to onboard new users.

If you haven’t noticed, when people buy bitcoin, they talk about it. We all have that friend who bought bitcoin and then wouldn’t shut up about it. Yes, I’m guilty of this – and I’m sure quite a few readers are too.

Perhaps subconsciously, holders become crypto-evangelists since convincing others to buy serves their own self-interest of increasing the value of their holdings.

Bitcoin evangelizing – spreading the good word – is what miraculously led to a price ascent from $0.001 to a recent price of $10,000.

Who could have imagined that its pseudonymous creator, fed up with the global banking oligopoly, launched an intangible digital resource that rivaled the value of the world’s largest currencies in less than a decade?

No religion, political movement or technology has ever witnessed these growth rates. Then again, humanity has never been as connected.

The Idea of Money

Bitcoin started as an idea. To be clear, all money – whether it’s shell money used by primitive islanders, a bar of gold or a U.S. dollar – started as an idea. It’s the idea that a network of users value it equally and would be willing to part with something of equal value for your form of money.

Money has no intrinsic value; its value is purely extrinsic – only what others think it’s worth.

Take a look at the dollar in your pocket – it’s just a fancy piece of paper with a one-eyed pyramid, a stipple portrait and signatures of important people.

In order to be useful, society must view it as a unit of account, and merchants must be willing to accept it as payment for goods and services.

Bitcoin has demonstrated an uncanny ability to reach and connect a network of millions of users.

One bitcoin is only worth what the next person is willing pay for it. But if the network continues to expand at an exponential rate, the limited supply argues that prices can only move in one direction… higher.

The Bottom Line

Bitcoin’s nine-year ascent has been marked with enormous bouts of volatility. Therewas an 85% correction in January 2015, and a few others over 60%, including a colossal 93% drawdown in 2011.

Through each of these corrections, however, the network (as measured by number of wallets) continued to expand at a rapid pace. As some speculators saw their value decimated, new investors on the margin saw value and became buyers.

The abnormal levels of volatility are actually what helped the bitcoin network grow to 23 million users.

Overheated Heating Oil Market

I was fortunate enough to be interviewed for a Wall Street Journal heating oil story last week. The primary question was, “How high can prices soar?” Supplies have tightened up considerably during Mother Nature’s onslaught and another bout of cold weather is hitting us, pushing prices higher yet again. Short-term demand related issues like the ones we’re experiencing now due to the weather are never a reason to jump into a market. My less than sensational outlook on current prices pushed me to the closing section of the article. This week, I’ll expand on the topic by looking at the diesel and heating oil markets and formulating a trading plan for the current setup.

I’ll work from big picture to fine detail in order to provide some context for the current situation. First of all, the fracking boom has fundamentally altered the energy landscape of the United States. We are quickly moving from net consumer towards becoming a net producer in the oil and natural gas markets. This paradigm shift is leading to an energy market structure that places us on the side of selling price spikes that are demand based. In this instance, bad weather has created a temporary increase in heating oil use. The price spike will not hold because we have the capacity to rebuild domestic energy stocks cheaply and rapidly.

The same bout of weather is responsible for driving heating oil costs to record levels in the Northeast where more than 80% of all heating oil is consumed. The flip side is that this same weather pattern is keeping people indoors. People staying inside only create heating oil demand. People in normal conditions add to diesel demand through their purchases of goods and services while they’re out and about spending money. Therefore, the net balance of the broader term market shifts towards a bearish supply issue as diesel fueled trucks have less to deliver and fewer miles to cover as citizens remain toasty and warm in their homes instead of out shopping and eating.

The domestic energy market can control supply but has little control over demand except at extremely high prices. Energy production costs are fairly fixed. The primary variable in an energy producer’s arsenal is capping low yielding wells. Prices as a trend however are falling in general as the current processes become more efficient in their cost of execution. Therefore, over time, energy prices should generally decline. Furthermore, energy producers in times of price spikes will sell as much of their expected forward production as possible at these higher prices. This allows energy producers to slow down price spikes through their implementation of profitable short hedges at unsustainable current market prices.

The best way to view these actions is by comparing spread prices to Commitment of Traders data. Spread prices allow you to compare the current market price against a forward price. Current prices or the cash, “spot” markets are the most volatile as they are the most susceptible to short-term supply and demand disruptions. Forward prices are more predictable due the amount of time left to factor in risk variables. Typically, these risk variables include physical storage, insurance costs and interest rates. This leads to forward contracts being priced structurally higher the farther out one looks. This is normal market behavior and the gradually elevated price along the timeline is called, “contango.” Conversely, in times of drama the spot price can overshoot the prices of the deferred contracts. This situation is called, “backwardation.” Backwardation is the market’s incentive to get producers to sell the physical product at the currently elevated price.

Drilling into the details, (pun intended) we can see that there’s definitely a premium in the delivery month futures contract. Knowing that this pricing structure is temporary along with the weather I’m going to let this entire rally pass. There are two reasons I think there’s a better place to buy. First of all, the heating oil market is nearing solid resistance on the daily, weekly and monthly charts. Secondly, I expect the demand numbers along with the general economic numbers for the next month to be dismal. This will lead to a selloff and drop the market under $3 per gallon. I expect the market to be supported around there and provide a solid bottom to buy into the spring driving rally. Don’t let the hype suck you in.

This material has been prepared by a sales or trading employee or agent of Commodity & Derivative Advisors and is, or is in the nature of, a solicitation. This material is not a research report prepared by Commodity & Derivative Advisors’ Research Department. By accepting this communication, you agree that you are an experienced user of the futures markets, capable of making independent trading decisions, and agree that you are not, and will not, rely solely on this communication in making trading decisions.

Protecting Stock Market Gains

This is the third cautionary report I’ve written on the stock market in six weeks. The last time I focused this heavily on the stock market was in early 2009. Back then, I was making a point to everyone who’d lost their shirt on the way down that employing the leverage provided by stock index futures contracts would be a great way to recoup some of their lost funds when the market bounced. This week, we’ll discuss the same strategy only in reverse. I’ll explain how to use leveraged futures to protect your equity portfolio ahead of time in case you haven’t taken the appropriate actions.

Everything that I’ve written over the past several weeks regarding the stock market still holds true. Quoting from our December 5th article, “… we have reached valuations that bode poorly for long term investing. Research abounds on the usefulness of long-term valuation models. Very simply, expecting these returns to continue through long-term investment at these valuations would set an historical precedence. Anything can happen in the world of markets but the odds clearly show that bull markets do not begin when the P/E ratio of the S&P 500 is above 15. The S&P 500’s P/E ratio currently stands above 19 and Nobel Prize winning Yale economist Robert Schiller’s cyclically adjusted price earnings (CAPE) ratio is over 25. Both of these will continue higher as long as the equity markets continue to climb. Neither is sounding the, “Everyone to cash,” alarm bell. Their history simply suggests that it would be foolish to expect these multiples to continue to climb and climbing P/E ratios are necessary for stock market growth.”

Coincidentally, the market is trading exactly where it was when I wrote that and after Friday the 24th’s action, we are in fact sounding an alarm bell. Friday’s action sounded a technical alarm based on the 90/90 rule. In short, 90% of the stocks in the S&P 500 closed lower for the day and 90% of the volume was on the downside. This analysis was originally publicized by Lowry’s Reports in 1975 and has been appropriately updated over time. The general market response is for an upward blip for a few days to a week followed by continuation of the selloff. This typically signals a momentum swing and could very well be the catalyst that brings the market back in line with long-term valuations.

The single most common phrase I hear for peoples’ failure to take protective measures for their portfolio is, “I don’t want to pay taxes on anything I have to sell.” The key to using stock index futures as a hedge against your portfolio falling with the broader market is the cash advantage that allows their low margins and high leverage to be put to work for you. The e-mini S&P 500 futures contract is one of the most liquid markets in the world. The face value of the contract is $50 multiplied by the index price, currently 1777.00. Thus the contract is worth $88,500. The margin, which is the amount of money the Chicago Mercantile Exchange (CME) needs on deposit to carry every contract from every market participant is currently $4,510. Both the buyer and the seller of the contract place this amount with the CME. This leaves a margin to equity ratio of approximately ten to one ($88,500/$9,020).

Here’s how it plays out in real terms. First of all, customers need more than the minimum margin requirement to trade. Otherwise, the first day the market closed above the initial entry price, the customer would be issued a margin call by the clearinghouse to make up the difference. Therefore, I suggest allocating enough capital for the minimum margin plus enough additional cash to cover general market fluctuation or, to a point that the trade becomes invalid and the hedge should be removed. In this case, I’d use the recent market highs of 1846.50 as a price that would invalidate the hedge’s necessity. The math works out as follows; $4,510 for margin plus $3,475 to allow for market movement from 1777 to the high at 1846.5 equals a necessary beginning cash balance of $7,985. This is the amount that’s needed to hedge $88,500 worth of the S&P 500 Index against further declines.

If we do get the 10% correction that we discussed in our January 16th letter, the cash balance in your futures account will have grown to $13,760. This would offset the loss incurred by your equities account without forcing you out of any positions or, leaving you with any capital gains tax to pay.

Finally, this is one case where a leveraged ETF simply won’t provide the same bang for the buck. There have been many studies that track inverse leveraged ETF’s against the underlying index and the research consistently shows that they fail to capture the same percentage gains on big down days as the futures markets on which the ETF’s are based. This is one of those times when trading and investing are best done via two separate vehicles.

The Significance of Thematic Investing

Index Services are dominating the investment markets from quite a long time by now. People who have the preference for diversity when it comes to investment are venturing towards the Thematic Investing. Here is the highlight on the significance of thematic investing.

It is an intuitive investing

This implies that instead of venturing into something unknown you can invest your hard earned money into the ideas as well as the trends that you are fully familiar with and the ones that you find exciting. Having a good knowledge about the same can provide you the capability of making the smart investment choice. As you go in for researching on your own this further makes your position comparatively strong. It further enhances your ability so as to customize your portfolio. You can invest in areas that interest you such as real estate, travel and healthcare.

You can align your values

Here you get the opportunity to be able to align the values that you think are important for you when it comes to your investment. You can simply invest in areas for which you hold the passion or the ones that are primarily focused on the social responsibility. You can simply make the world a better place to live with the help of your investment.

You have a vast choice

There are companies that give you the portfolio well prepared in advance if you so desire. On the contrary, you have the option to create a portfolio for yourself. There is a plethora of option of mutual funds that are available to you as an investor.

Helps to generate alpha

Thematic investing is the best way to get the opportunity for to generate alpha. By imply focusing you’re your investments in the hot spots where you can distribute the sizeable amount of your capital, you can easily generate the alpha. By simply analysing the other portfolios you can come at a decision for yourself.

Gives you flexibility and transparency

By simply creating your own portfolios you open up the gateways to great opportunities. Being able to customize your portfolio is a great advantage in itself. All that you need is to have a great visibility as well as control in addition to the transparency with no hidden cost. You get the clarity of your fractional share as well as the penny.

It is easy to access

Gone are the days when only a limited number of people had an access to the thematic investing due to the fact that the portfolio structures were not only expensive but at the same time restrictive as well as complex that consumed a lot of time for their maintenance. Most of these were available to high net worth investors. Today such is not the case as it has gained popularity, and become accessible for investors f all the brackets.

The Dollar Could Easily Get Stronger

Ever since the start of 2017, the dollar has been in an almost constant decline.

In fact, the PowerShares DB U.S. Dollar Bullish ETF (NYSE: UUP) has dropped over 12% from its 2017 highs, despite a 2% gain.

UUP is an exchange-traded fund that measures the dollar against six other currencies. When the dollar strengthens relative to the others, the price of UUP goes up.

Generally, the dollar is seen as a safe haven, somewhere for investors to put their money in times of market uncertainty. And since we have seen a market that went straight up over a 15-month period, there was less demand for safety assets like the dollar.

But that can only last so long. Right now, there is a fear of inflation in the markets due to higher employment and wages.

When the economy is strong, inflation usually follows. That’s because when people make more money, they spend more. And when more money is spent, there’s more in circulation, and the excess supply makes each dollar less valuable.

However, inflation fears are likely overblown due to the fact that we haven’t seen an economy this strong since before the financial crash.

When inflation gets too high, it sends production costs up and business slows. But right now, inflation remains steady around 2%.

That may seem high, as it was around 0% for all of 2015 and some of 2016, but in the big picture, it’s normal. In fact, it’s seen as healthy.

As a reference, inflation had gotten over 4% in 2005 and 2006, right as the economy showed signs of slowing.

Many are wondering how to profit from this analysis.

Demand for the Dollar

The dollar could easily get stronger from here as well.

Right now, a huge part of the world’s economy has extremely low interest rates. Much of Europe, for example, is under 1%, and they aren’t planning on raising rates aggressively anytime soon.

The United States, however, has a rate of 1.5%. This isn’t high, but we could easily see that go over 2% this year if the economy stays healthy.

That would also increase the rate of government bonds, which is 2.86% right now. As the rate get higher, international investors will begin to buy more U.S. bonds, which increases demand for the dollar and sends its value up.

How to Profit

Even though the only way to directly invest in the strength of the dollar is through UUP, there are other ways with higher return potential.

One is buying call options on the UUP fund, but that’s much riskier, as you could lose your whole investment.

Another way would be buying a leveraged ETF against a different currency.

For example, the VelocityShares Daily 4X Long USD vs. EUR ETF (NYSE: DEUR)returns four times the percentage that the dollar appreciates against the euro.

There are also similar funds that produce the return of the dollar against other currencies, like the pound (NYSE: DGBP), the yen (NYSE: DJPY) and the Australian dollar (NYSE: DAUD).

Investing In Silver For the Long Term

Many people are aware that silver is one of the most in demand precious metals in the world. Silver is a very common precious metal that is used to make jewelry, utensils, computers, vehicles, industrial metals and so on. It is one of the commonly traded precious metals in the commodity market, like gold. It has given many of the enthusiastic investors good returns for their investment in the commodity market. Silver is a very safe precious metal to trade with unlike foreign exchange or other areas in trading.

Lower Risk Factor

Silver has lower risk factors when compared to many other commodities as well as stocks, and shares. The risk in trading sliver is very low when compared to bonds or ETFs. If you are looking to invest in the market for long term, then there is no better commodity that you can think of than silver. It is not similar to any stock trading business but, is more or less similar to gold, which always has a value in it.

Accumulating Silver

One of the best ways to gain good profits out of silver trading is to consider it as a long term investment option. Silver is highly volatile like gold and if you are knowledgeable about making the right moves in silver trading at the apt times, you will end up pocketing good amounts of profit. You should always invest in silver with a long term bullish attitude. Accumulating silver at regular intervals will help in increasing your wealth insurance as well as can be a good trading instrument.

Invest In Physical Silver

One of the best ways of making better investments is to buy silver in its physical form. It not only adds on to your wealth over the years, but you will also be experiencing a steady increase in the price of the silver. There is no dearth for availability of physical silver as you can get it in the form of mint coins that are minted by mining companies, or even can get it in the form of fine bullion that is produced by the national governments.

Silver Bullion

One of the best ways and the traditional way of investing in silver to enjoy long term benefits, is to go for silver bullion. You can opt to buy silver bars which are rectangular metal pieces that come in different sizes ranging from 1 troy ounce bars to 1000 troy ounce bars. You can store these silver bars in your home or even better, in your bank lockers. You can sell all of it or trade in limited quantities whenever you feel that the price of silver is at its peak. Silver is easier to buy than the gold bars, and is also a much cheap investment option with huge returns, very similar gold.

Small Investments

One of the main advantages that you will get by investing in silver is that it just attracts small funds. This small investment can lead to huge profits after many years. With just about $10,000 you can buy huge quantities of silver. You will be able to increase your assets and wealth by investing in physical silver. It is a good buffer that you can always rely on whenever there is an economic crisis, you may need greater financial support in times of financial disasters.

Keep Tab Of Gold Rates

Silver and gold always go hand in hand and hence you need to keep a tab on the rates of gold every time when you have invested in silver. They both normally trade in harmony and whenever gold prices sky rocket or is increase, the prices of the silver will also be seeing an upward trend, and vice versa. But, the fact is that silver is available in more quantities than gold. There is almost 16 times more silver than gold in the world, and this is the reason why demand for gold is in excess of its supply.

Invest During Inflation

One of the top most methods that you can think of to invest in silver is when there is inflation. If there is a few issues related to the stability of the financial market, then gold and silver would more often than not be the main hedge against inflation. Many people will try to look at various other options when the gold prices are soaring, and the next best option of investment is surely silver. This precious metal is chosen by many because of its huge affordability. These type of chances do not come often and when you encounter such a chance, it is important for you take advantage of this and enjoy a good return on investment. This is the reason why you need to think of buying silver as a long term goal.

Advantages Of Investing In Silver

The following are the advantages that you can enjoy when you are investing in silver.

The demand for silver is always there until silver is used for industrial purposes. The demand for silver does not depend upon the economic condition that much. As there is constant demand for silver, its prices will keep on increasing and hence is a very good source of investment option if you are looking for long term returns.
Silver is known as ‘poor man’s gold’. It is highly affordability when compared to gold or other precious metals and it also offers better returns.
As silver is traded in different forms all over the world, it has high liquidity. Silver, in fact, was used as a currency in many parts of the world earlier.
You can also invest in silver in various forms like: silver bars, bullion coins, jewelry, junk silver, scrap silver, collector’s coins as well as silver rounds.