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How to Code Your Own Algo Trading Robot

What an Algorithmic Trading Robot Is and Does

At the most basic level, an algorithmic trading robot is a computer code that has the ability to generate and execute buy and sell signals in financial markets. The main components of such a robot include entry rules that signal when to buy or sell, exit rules indicating when to close the current position, and position sizing rules defining the quantities to buy or sell.

The Main Tools

Obviously, you’re going to need a computer and an Internet connection. After that, a Windows or Mac operating system will be needed to run MetaTrader 4 (MT4)—an electronic trading platform that uses the MetaQuotes Language 4 (MQL4) for coding trading strategies. Although MT4 is not the only software one could use to build a robot it has a number of significant benefits.

Algorithmic Trading Strategies

It is important to begin by reflecting on some core traits that every algorithmic trading strategy should have. The strategy should be market prudent in that it is fundamentally sound from a market and economic standpoint. Also, the mathematical model used in developing the strategy should be based on sound statistical methods.

Next, it is crucial to determine what information your robot is aiming to capture. In order to have an automated strategy, your robot needs to be able to capture identifiable, persistent market inefficiencies. Algorithmic trading strategies follow a rigid set of rules that take advantage of market behavior and thus, the occurrence of a one-time market inefficiency is not enough to build a strategy around. Further, if the cause of the market inefficiency is unidentifiable, then there will be no way to know if the success or failure of the strategy was due to chance or not.

The Bottom Line

Considering that Richard Dennis, the legendary commodity trader, taught a group of students his personal trading strategies who then went on to earn over $175 million in just five years, it is completely possible for inexperienced traders to be taught a strict set of guidelines and become successful traders. However, this is one extraordinary example and beginners should definitely remember to have modest expectations.

In order to be successful it is important to not just follow a set of guidelines but to understand how those guidelines are working. Liew stresses that the most important part of algorithmic trading is “understanding under which types of market conditions your robot will work and when it will break down,” and “understanding when to intervene.” Algorithmic trading can be rewarding but the key to success is understanding. Any course or teacher promising high rewards with minimal understanding should be a major warning sign.

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