Categories of Decision Making Algorithms in Trading

Decision Making Algorithms in Trading

Everyone knows that algorithmic trading is a giant now in the world market. But these algorithms will go various modulations in accordance with the market space and the trader requirements. But under a broader classification the algorithms can be classified into three as decision making algorithm, execution algorithm and the execution plus algorithm. Each will do there respective jobs as its names define. This article will be explaining the various categories that are found in the decision making algorithm. This will help the traders to better understand what algorithm to be selected for their trading requirements.

Types of Decision Making Algorithms

  1. Market making – this is nothing but selling and buying of the models at a very appropriate bid/offer spread. The trader will make money by constantly selling the models at the pre determined bid/offer spread and he will be creating the market.
  2. Index arbitrage – in this the traders will often get their profit from the discrepancies between the price of the constituent underlying and the index price.
  3. Pair trading – in this the model or the stock will usually get its price linked with the external sources usually. When there is a change in the price of the external factor, then the price of the stock will also get altered. It may sometimes end up in profit and sometimes in loss.
  4. Statistical arbitrage – in this case, the strategies will be little complex or even more complex sometimes according to the need of the trader. Again, just as the pair trading, there is a correlation required in this category also. But not just between two. The correlation will be between hundreds of models and the profit will be made based on the discrepancies between the stocks. But these discrepancies must be usually for a short span of time.
  5. Technical analysis – this is nothing but another form of statistical trading. This is more applied to the volume charts and the time series prices. The Bollinger bands and the moving averages are the typical tools that will be used to identify the trends and the patterns.
  6. Automated gaming – this is a strategy that will be looking at the market participants of other marketers and will observe their activities and then will try to anticipate their future activities. By this way the marketer who makes use of this will play games at the trade of other marketers and will earn good profit out of it.

High frequency trading – in this the orders will be checked at a really faster speed than any other strategies. Though the other categories can make use of HFTs, there are more specific HFTs available in the market for meeting the trader requirements. If you are planning to have your future in the trading platform, then it is better to go for a certification course in algorithmic trading, which will give you a great exposure towards the world trade and also an assured trading job in the future.


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