Algorithmic trading is the new buzzword. But what is algorithmic trading? In many cases, what people call algorithmic trading is just automated trading. Let's go over the differences between the two.
What's the difference?
With automated trading, all analysis and research are performed by you. You set the desired price point to buy or sell. The automation comes into play when a stock reaches the desired price point. The same automation can include stop-loss levels and profit target levels.
Algorithmic trading is very similar to automated trading. All of the buying and selling actions are the same. The primary difference is, algorithmic trading takes on the analysis for you. The algorithmic system uses the analysis results to set the desired price point and then act upon it.
There are some distinct advantages with Algorithmic trading.
Automating the stock analysis will free up some of your time.
The emotional liability is removed from the decision making.
The analysis is less error-prone.
None of us want to spend our lives tethered to a computer to do research. A computer can perform the stock analysis on several stocks in less time than it may take us to do just one. So, why not let it?
Probably the largest downfall that traders experience is emotions. What do I mean by this? The money we work hard for every day has a strong tie to our emotions. If we are short on money, we tend to be more stressed. When we receive extra money, we are happier. So, what happens when the price of your stock drops significantly? Most likely, you will panic. You could either sell loss or hold on to it in the hopes it will recover. Algorithmic trading alleviates the stress by removing your emotional tie. Now, wouldn't that be nice?
Computers are great at repetitive tasks. You could tell a computer to add 2+2 one thousand times and, you would not hear one single complaint. When it comes to humans, this is not the case. Humans get tired. We become easily distracted when it comes to repetitive tasks. Eventually, we end up making mistakes. Why not just let the computer do the work for you?
Tools of the trade
There are several tools available that already have both of these capabilities. One such tool is TradingView, and another is MT5. Both of these options offer an overwhelming number of features for the amateur trader. Many of the options available I was never going to use. There were certain features I was looking for, but that is not available. Well, at least without an additional cost. Both of the tools I mentioned do have some scripting capabilities. However, they can be a bit complex and limited in features. The community surrounding these tools seems to be a little smaller and not the most helpful.
Because of this, I decided to build my own using Python 3. With Python, I will have total control for complex algorithmic functions, analysis, and much more. There are several Python libraries designed around data science and financial analysis.
It is important to note that as of 12/31/2019, Python 2 has reached its end of life.
I will be sharing my progress and code in future articles. The source code will be available to all from the GIT repository. I will provide a link to the source repository in those articles.
Going for broker
One of the biggest factors in algorithmic trading is the broker. The list of commission-free brokers grows daily. So, which broker is right for you? Below, I have included a list of brokers I have had experience with.
Webull
PROS:
- There is no minimum for opening an account.
- The web application provides a large amount of data.
- Webull has a mobile app available.
- They offer a paper trading option.
CONS:
- Webull has no API or API module available.
Robinhood
PROS:
- One of the first commission-free brokers.
- There is no minimum for opening an account.
- The web interface is very simplistic and easy to use.
- Robinhood has a mobile app available.
- There is an API module available for Python.
CONS:
- The API is not supported by Robinhood.
- Updates to Robinhood's site could break the API.
TD Ameritrade
PROS:
- Newly commission-free.
- Educational resources are available to members.
- They offer a vendor-supported API.
- Technical support is readily available.
CONS:
- The original con I had was the $6.95 commission fee. I will need to do further research to see if there are any cons.
Alpaca Markets
PROS:
- They offer a vendor-supported API.
- The API supports both Paper and live trading.
- There is no minimum for opening an account.
- The web interface is very simplistic and easy to use.
- Alpaca has a mobile app available.
- Alpaca has a very active and helpful user community.
- They offer market data via the API for free.
CONS:
- Alpaca is new to the trading game.
After looking at each broker, I decided to use Alpaca. Alpaca seemed to be the best fit for what I needed.
*At the time my decision was made, TD Ameritrade still had a commission fee. *
What's next?
We have chosen our method and our broker. The next step is designing our application. In our next article, we will begin the discussion for the design of our application.