I've Known Algos's to be Correlated with HFT, but I never really understood the concept. Can someone briefly Explain what they are? This would be much help.
Algo's - What are they?
- Thread starter The Humble Bunch
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Just click on my profile and read through my threads and comments.
I'm one of the only guys on here that actually breaks down HFT and how it is being used. This is not simple to understand. Most people say algo and arb but they can't really give an example that is based on market microstructure.
When most people say algo they mean automated trading/algorithmic trading.
HFT is used in market making and to compete for optimal queue positioning among liquidity providers. It is also used to do complex order executions including arbitrage.
This can be arbitrage within an exchange or across exchanges. If you are going to trade securities on an electronic venue, understanding this technology is crucially important.
I'm one of the only guys on here that actually breaks down HFT and how it is being used. This is not simple to understand. Most people say algo and arb but they can't really give an example that is based on market microstructure.
When most people say algo they mean automated trading/algorithmic trading.
HFT is used in market making and to compete for optimal queue positioning among liquidity providers. It is also used to do complex order executions including arbitrage.
This can be arbitrage within an exchange or across exchanges. If you are going to trade securities on an electronic venue, understanding this technology is crucially important.
Algorithms are stylized mathematical phrases often presented as rules.
Your actions at a traffic signal are subject to a consistent logic that is easily coded into a set of decisions rules: "Algorithmic, man!"
Rules-based trading is easily coded -- can be based off of week-long or month-long candles; can be based off of end-of-day data (as I use); can be based on minutes or seconds or teeny-tiny fractions thereof. If these rules happen to be coded and you happen to trade through them, that is algorithmic trading.
100% of "HFT" is algorithmic, of necessity. But there is much much more to algos than HFT. And when people bitch about The Algos Are Ruining The Market[!!!] and such, they are shouting loudly that they are clueless.
No magic -- just encoded discipline.
Your actions at a traffic signal are subject to a consistent logic that is easily coded into a set of decisions rules: "Algorithmic, man!"
Rules-based trading is easily coded -- can be based off of week-long or month-long candles; can be based off of end-of-day data (as I use); can be based on minutes or seconds or teeny-tiny fractions thereof. If these rules happen to be coded and you happen to trade through them, that is algorithmic trading.
100% of "HFT" is algorithmic, of necessity. But there is much much more to algos than HFT. And when people bitch about The Algos Are Ruining The Market[!!!] and such, they are shouting loudly that they are clueless.
No magic -- just encoded discipline.
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What do you mean by correlated? You mean associated?
its a recipe. a simple algo is buy XYZ at 10am and sell XYZ at 4pm
Formulas which look at past data, number crunches the data in a manner the author constructed which has high probability outcomes.
For a simple example, perhaps the author decided that stocks which have consistently closed near highs more than its peers over a certain lookback time period has a higher probability of outperforming.
The formula identifies what 'near highs' is, sums it over a lookback of 'x' days then number crunches all stocks on nyse and voila, there's your result of which ranks highest to lowest. The trader may select the highest ranking as well as the lowest ranking (contrarian trade)
For a simple example, perhaps the author decided that stocks which have consistently closed near highs more than its peers over a certain lookback time period has a higher probability of outperforming.
The formula identifies what 'near highs' is, sums it over a lookback of 'x' days then number crunches all stocks on nyse and voila, there's your result of which ranks highest to lowest. The trader may select the highest ranking as well as the lowest ranking (contrarian trade)
Daaaa-YUM. Most mechanical-looking chart ever.
Pseudo-code algo for trading it:
Code:
If the trend was down but is now sideways or up:
1. If we're flat:
* If the current bar is red and its height is greater than the span covered by the last 8 bars, note the close of the previous bar ("sell level") and buy at market.
2. If we're long:
* If the price is at 90% of "sell level", sell.
If the trend was sideways or up but is now down:
1. Get flat.Er, just in case: if you make a gazillion buckazoids with this brilliant, elaborate program, don't forget my 10%. Cash in unmarked bills only.
Deal 
(i have seen few, even better ones, tho can't find the screens anymore ; it was , like completely identical moves, for a year or two & and the difference between lows and highs were 10 cents or so)