A Simple Algorithmic Trading Example

Very often, retail traders are intimidated by the idea of “algorithmic trading,” often equating it with high frequency trading.  Algorithmic trading simply means trading by fixed rules, and since computers are better and faster than humans at calculating the rules, we often hand off the task to computers for the trading rules to be automated.  On the lower-speed end of the scale, which I personally favor, it’s possible to trade these rules manually.  ETF HQ has a great example of this in their twist on Dow Theory, Market Timing Through Market Dominance — TransDow.  It describes a system that uses the ratio of the Dow Jones Transportation Average to the Dow Jones Industrial Average to determine whether the transports are leading the market (dominant) or lagging the market, and goes long or to cash accordingly.  Since it uses weekly prices, anyone can download the data from Yahoo Finance, throw it into a spreadsheet, and enter orders over the weekend.  These sorts of simple algorithmic trading models are a great place to start before tackling daily or intra-day strategies.  Read the article here.

Update:  Woodshedder is trying to implement the system in Amibroker, for those who use it.  It appears to produce different results from the system shown by ETF HQ, but may be a good starting point.

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