Mike from Quantstart posted a great, comprehensive look at the process and necessary steps in creating an algorithmic trading strategy. It’s a long article, but it is a great survey of all of the tools you will need to get the job done (you can find many of the tools mentioned in the article, and even more on the Algorithmic Trading and Autotrading Universe page). Just to summarize the main points, Mike points out that in order to maintain discipline and successfully trade (both on a discretionary and non-discretionary basis), one needs to know one’s own personal preferences. If you create a strategy or use someone else’s, and it doesn’t match your own preferences, you will be tempted to intervene and override the trading rules set forth by the strategy, which will result in failure.
Mike also points out that continuous research is necessary to succeed when using algorithmic trading strategies. The market changes, new players will enter and old players will leave, and strategies will eventually fail. It’s important to stay ahead of the curve by constantly improving and adapting one’s trading to the market. To do this, we must have a pipeline of ideas, and Mike suggests several resources to help one develop these ideas and stay on top of new developments in the quantitative finance world.
Finally, Mike points out that one needs to gather accurate historical data to conduct tests on the strategy, and then points out several metrics by which the strategy can be evaluated.
It’s a great article to read to get a sense of what’s required to get involved in the algorithmic trading world. Don’t be intimidated; just start with something simple, and gradually add more sophisticated components to your strategy. Get your hands dirty by looking at examples already extant on places like Quantopian or QuantConnect, and modify the code to see what happens. If you’re not ready to program a strategy, try a visual tool like Equametrics’ Rizm that lets one visually build an algorithmic trading strategy. Or instead, use a tool that you’re probably using every day already– build something in Excel to get used to the idea of trading by firm rules. Visit the Algorithmic Trading and Autotrading Universe to see what other tools and resources are available (the page is constantly updated as new resources emerge and old sites close). Get started by reading the entire article over at System Trader Success.