Investment Strategies

Investment Strategies: How to use AI and Trading Algorithms

According to one study, 53% of families in America own stock.

If you’re interested in investing but want to automate a lot of the process, you can look into trading algorithms and AI bots.

But how does algorithmic trading and using a trading robot work? Keep reading to learn all about how to implement them into your trading strategy. 

Get Started

To get started, you’ll have to first build your own trading algorithm. You’ll first need to come up with a strategy, some rules, a list of assets you want, and the conditions of the market that you want to trade in. 

Next, you’ll need the algorithm. This will help to put your strategy into terms that the computer can carry out. 

Thankfully, you don’t have to know how to code in order to make your own automated trading solution. You may need to understand the basics, like Python. But if you know the basics, you can find platforms like KJ Trading Systems that will let you build your own. 

When you work in an application that has a programming interface, you’ll have more options to customize and control the code to really fine-tune it to what you want.  

Once you start coding your strategy, you’ll have to understand how to write logic statements into your code. For example, you can say “If the market looks like this, invest in this.” So you’ll have to have a good knowledge of investments and the market as well.

Investment Strategies

Now that you know how to come up with an algorithm, you need to decide what investment strategies you want to use. 

You should have a strategy that focuses on the condition of the market. You may even want to use mathematics to come up with a strategy that is based on statistics. 

However, for the robot to understand what you’re asking of it, you’ll need to give it information that is identifiable. You’ll need a hard set of rules for it to follow. 

You should find a strategy that is tailored to your characteristics. For example, you’ll have to consider factors like time commitment, trading capital, and your personal risk profile. 

Index Fund Rebalancing

One strategy is creating a portfolio of the index and mutual funds for your pension or retirement accounts. You may need to constantly adjust them in order to reflect what the prices are on the market. 

When you need to rebalance, you can use an algorithm to capitalize on expected trades, but this depends on how many stocks are in your index fund. 

When you use an algorithm to monitor the market based on this, then you’ll be able to buy the best prices and have timely results. 

Market Timing

You can also code a strategy that will time the market perfectly. You’ll need to use live testing, backtesting, and forward testing for this to work.

Backtesting is the first stage, and you’ll have to simulate trades in a sample data period so that algorithm knows what to look for. 

Next, you’ll have to run optimization. This is the second stage, and you’ll run algorithms with sample data to make sure that it knows what you expect of it. 

Once the algorithm has all that data, you’ll be able to do optimization so that you get the best results when it performs for real.

Next, you’ll have to do live testing, which is where you’ll compare live trades with the ones that you tested previously. 

Mean Reversion

If you’re good at math, you could also try using the mean reversion for investing in stocks. This will help to calculate the average of stock’s high and low prices.

When you have that information, you can plug it into your algorithm to identify what the trading range should be. If the market price is behind the average price, then the stock might be a good investment, because you’ll be hoping that the price will increase to the average high. 

However, if a stock price is above the average price, you may not want to buy it yet. Instead, wait for the price to fall closer to the average price. 

Benefits

When you trade with an algorithm, you’ll make sure that you trade your stocks at the best prices. When you do have a trade, the algorithm will place it accurately and instantly, so you won’t have to worry about accidentally buying any shares. This will reduce any manual errors that you could’ve accidentally made. 

They will also time it so that you avoid buying something at the wrong price when it shoots up. 

Thankfully, you won’t have to pay as much for transaction costs either. 

If you aren’t sure if something is a smart decision or not, you can also use the algorithm to rely on real-time and historical data to see if you should trade or not. 

One of the main benefits of using an algorithm is that it is objective. You won’t have to worry about your emotions or feelings getting in the way of potentially making a disastrous decision. 

Learn More About Trading Algorithms

These are only a few things to know about how to create your own trading algorithms, but there are many more things to try. 

We know that finding a trading strategy can be stressful, but we’re here to help you out.

If you enjoyed this article, make sure that you explore our website to find more articles just like this one!

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Christophe Rude

Christophe Rude

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