Algorithmic Trading 101: A step by step guide for beginners
Are you thinking of starting algorithm based investing? Then this article is definitely for you because it sets out a clear road map for traders and non-traders who are planning to initiate forex or stock market trading. Understanding algorithm based investing requires a preliminary knowledge of trading fundamentals since the former is nothing but an advanced form of the latter.
What happens behind the scene?
What factors determine the fuel prices? The demand for oil, the production capacities of leading oil producers, political developments in the regions where oil production is located, the pace of global economic growth or decisions taken by OPEC (Organization of the Petroleum Exporting Countries). Just like any other goods, currencies and share prices are also affected by so many factors and having the knowledge of these main factors gives several advantages to traders.
At the top of the list of factors that affect forex and stock prices comes interest rates. Under ideal conditions, interest rates control the amount of money that circulates in an economy. In general, offering higher interest rates are likely to attract foreign investors, which results in the appreciation of home country’s currency while lower interest rates are expected to lead to the opposite scenario. A very recent example of this tendency is Russian central bank’s decision to double interest rates in the wake of a plunge in the value of Russian rouble. While interest rates are a key determinant, a host of matters such as political stability and economic growth control the overall process. For example, housing sector data can be an important indicator and traders usually keep a close eye on data releases about housing prices or the level of unsold homes.
Inflation!
In parallel to interest rates, inflation is also an important variable that affects the value of a country’s currency. To make a simple description of inflation, it can be defined as “the increase in the prices of goods or services”. Having a significant impact on the value of currencies, high inflation means depreciation in the value of currency while lower rates of inflation is a promising indicator. Therefore, traders are advised to closely follow inflation rates or things that can directly or indirectly affect inflation.
Comparison of inflation/interest rates of European Union countries also suggest the direct correlation between these two indicators. For instance, the interest rate is 4.5% in Czech Republic while the inflation is 9.9% in this country. On the other hand, the inflation in Hungary is 7.9% while the country’s interest rate is only 3.4%. As the figures demonstrate, the higher the inflation is, the higher the interest rate is likely to be.
Gross Domestic Product (GDP)
Gross Domestic Product (GDP) refers to the total value of all the goods and services that are produced in a given country in a certain period and it is usually calculated on a yearly basis. In this regard, GDP is a key indicator of a country’s economic performance. For instance, GDP of United States stands at around 20 trillion US dollars while GDP of China is around 14 trillion US dollars. United States and China are followed by Japan (around 5 trillion US dollars), Germany (3.8 trillion US dollars), and the United Kingdom (2.7 trillion US dollars) respectively. Shedding light on the might of a country’s economic performance and industrial development, GDP acts as a beacon for traders.
In addition to the factors mentioned above, availability of natural resources, qualified labour force and technological capabilities can all give investors insight about countries’ economic performance.
Technical Analysis
Understanding these macro level parameters is not the only way of navigating in the kingdom of forex and stock market trading. In order to forecast the price movements in forex or stock market, traders and investors can also resort to a great number of technical methods whose effectiveness is always a matter of controversy among traders.
Availability of data and computational power of digital tools makes it possible for investors to make predictions about the movements of shares and currencies. Almost all trading platforms offer visual tools like charts and graphs so that traders can test the water. These visual instruments are used in order to discover potential buy or sell points as well as determining resistance and support levels for the asset in question.
Support and resistance levels are among the must know trading terms that anyone interested in trading is supposed to have an idea about. In this respect, support level can be defined as the minimum level the price could possibly fall. Resistance level, on the other hand, refers to the upper price level above which the price is considered unlikely to go. In other words, support and resistance levels are reference lines which are not definitive since the market can always move below or above these levels.
However, it should also be born in mind that technical analysis necessitates high-level technical and technological know-how since the procedures involved in technical analysis can be very complex and sometimes even misleading. In order not to get caught in these traps, you can think of buying algorithmic and technical trading services offered by the best automated investment platforms like Zeus Capital, which take technical analysis to yet another level and inject the magic of “computer algorithms” into the whole process of trading.
