Learn Algorithmic Trading: a Step by Step Guide

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27 October 2022


For beginners who want to venture into algorithmic trading, this article will serve as a guide to all the things that are essential to get you trading the algorithmic way.


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For beginners who want to venture into algorithmic trading, this article will serve as a guide to all the things that are essential to get you trading the algorithmic way.


Acquire knowledge in quantitative analysis, trading, and programming and learn from the experience of market practitioners in this step-by-step guide as it guides you through the basics and covers all the questions that you would need to know to learn algorithmic trading. With the boom in technological advancements in trading and financial market applications, algorithmic trading and high-frequency trading is being welcomed and accepted by exchanges all over the world.

Within a decade, it is the most common way of trading in developed markets and is rapidly spreading in developing economies. It is essential to learn algorithmic trading to trade the markets profitably.


Here is What You Should Know

An important point to note here is that automated trading does not mean it is free from human intervention. Automated trading has caused the focus of human intervention to shift from the process of trading to a more behind-the-scenes role, which involves devising newer alpha-seeking strategies on a regular basis.

In the past, entry into algorithmic trading firms used to be restricted to PhDs in Physics, Mathematics or Engineering Sciences, who could build sophisticated quant models for trading. However, in recent years there has been explosive growth in the online education industry, offering comprehensive algorithmic trading programs to wannabe algorithmic traders. This has made it possible to get into this domain without having to go through the long (8-10 years) academic route.


Difference Between Algorithmic Trading, Quantitative Trading, and Automated Trading

There is often a lot of confusion between algorithmic trading, automated trading, and HFT (high-frequency) trading. Let us start by defining algorithmic trading first.

  • Algorithmic trading: Algorithmic trading means turning a trading idea into an algorithmic trading strategy via an algorithm. The algorithmic trading strategy thus created can be backtested with historical data to check whether it will give good returns in real markets. The algorithmic trading strategy can be executed either manually or in an automated way.
  • Quantitative Trading: Quantitative trading involves using advanced mathematical and statistical models for creating and executing an algorithmic trading strategy.
  • Automated Trading: Automated trading means completely automating the order generation, submission, and order execution process.

Trading strategies can be categorized as low-frequency, medium-frequency and high-frequency strategies as per the holding time of the trades.

High-Frequency Trading (HFT) - High-frequency trading strategies are algorithmic strategies that get executed in an automated way in a quick time, usually on a sub-second timescale. Such strategies hold their trade positions for a very short time and try to make wafer-thin profits per trade, executing millions of trades every day.


Steps To Becoming An Algo Trading Professional

In the sections below, we outline the core areas that any aspiring algorithmic trader ought to focus on to learn algorithmic trading. We also present our readers with a comprehensive picture of the different ways and means through which these essential skill sets can be acquired:


Step 1: Core Areas Of Algorithmic Trading

Algorithmic trading is a multidisciplinary field that requires knowledge in three domains, namely,

  • Quantitative Analysis/Modeling
  • Programming Skills
  • Trading/Financial Markets Knowledge

Quantitative Analysis

If you are a trader who is used to trading using fundamental and technical analysis, you would need to shift gears to start thinking quantitatively. Problem-solving skills are highly valued by recruiters across trading firms. Working on statistics, time-series analysis, and statistical packages such as Matlab, and R should be your favorite activities.

Exploring historical data from exchanges and designing new algorithmic trading strategies should excite you.

Trading Knowledge

This knowledge will be crucial when you interact with the quants and will help in creating robust programs. A professional Coder/Developer in a trading firm is expected to have a good fundamental knowledge of financial markets, such as:

  • types of trading instruments (stocks, options, currencies etc.),
  • types of strategies (Trend Following, Mean Reversal etc.),
  • arbitrage opportunities,
  • options pricing models, and
  • risk management

Programming Skills

The strategies created by the quants are implemented in the live markets by the Programmers. If you want to excel in the technology-driven domain of automated trading, you should be willing to learn new skills, and you shouldn’t be disinclined in any field. So if you have never printed “hello world” by compiling your own coding program, it’s time to download the compiler of your interest - C++/Java/Python/Ruby and start doing it!

The best way to learn to program is to practice, practice and practice. Sound knowledge of programming languages like Python/C++/Java/R is a prerequisite for a Quant Developer job in trading firms. 


Step 2: How To Become An Algo Trading Professional?

Getting started with books

Algorithmic trading books are a great resource to learn algo trading. You will find many good books written on different algorithmic trading topics by some well-known authors. As an example, To hone your knowledge of derivatives, the “Options, Futures, and Derivatives” book, authored by John C. Hull, is considered a very good read for beginners.

For algorithmic trading, one can read the “Algorithmic Trading: Winning Strategies and Their Rationale” book by Dr. Ernest Chan.

Free resources

In addition to the algorithmic trading books, beginners can, follow various blogs on algorithmic trading; watch YouTube videos, catch trading podcasts (e.g., Chat with Traders), attend online webinars, or one can also register for the free courses that are available on various online learning portals

Although these free resources are a good starting point, one should note that some of these have their own shortcomings. For example, algorithmic trading books do not give you hands-on experience in trading. Free courses on online portals can be subject-specific and may offer very limited knowledge to serious learners. Another important point to note is the lack of interaction with experienced market practitioners when you opt for some of these free courses.

Learn from Professionals/Experts/Market Practitioners

The building blocks in learning Algorithmic trading are Statistics, Derivatives, Matlab/R, and programming languages like Python. It becomes necessary to learn from the experiences of market practitioners, which you can do only by implementing strategies practically alongside them.


You can join any organization as a trainee or intern to get familiarized with their work ethics and market best practices. If it’s not possible for you to join any such organization then you can opt for classroom courses/workshops or paid online courses. Most of the classroom courses/workshops are delivered in the form of 2 days to 2 weeks long workshops or as a part of Financial Engineering degree programs.

Self-learning Online

On the online front, there are online learning portals such as QuantInsti, Coursera, Udemy, Udacity, edX, & Open Intro, that have expert faculty from mathematics and computer science backgrounds who share their experiences and strategy ideas/tactics with you during the course.

Getting placed in the algorithmic trading domain

It is often seen that students who would like to get placed in high-frequency trading firms or in quantitative roles go for MFE programs. Most of the MFE programs give a very good overview of mathematical concepts, including Calculus, PDE and Pricing Models. 

For learning quantitative trading, what is also required is the implementation of these skills/theories on actual market data under a simulated environment. It is always better to get trained by practitioners and traders themselves if the aim is to go out there and make some money! If you would like to pursue research in these fields, then taking a more academic path is recommended.


Step 3: Get Placed, Learn More And Implement On The Job

Once you get placed in an algorithmic trading firm, you are expected to apply and implement your algorithmic trading knowledge in real markets for your firm. As a new recruit, you are also expected to have knowledge of other processes as well, which are part of your workflow chain.

As an example, firms that trade low latency strategies will usually have their platform built on C++, whereas in trading firms where latency is not a critical parameter, trading platforms can be based on a programming language like Python. Thus, it becomes essential for wannabe and new Quant Developers to have an understanding of both worlds.

New recruits working on specific projects may be given brief training to get a good grasp on the subject. Trading firms usually make their new recruits spend time on different desks (e.g., Quant Desk, Programming, Risk Management Desk), which gives them a fair understanding of the work process followed in the organization.

To put it in subtle words, Learning in the algorithmic world never stops!!


Published with permission from our partner QuantInsti®


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