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History Of Systematic Trading

The modern world has made numerous technological advancements available to the common man. This includes systematic (algorithmic) trading. Markets have always followed certain patterns and trends. The best traders at rapidly crunching numbers could make profits. Now these systematic trading strategies are available to all.

Profit from Volatility

Professional traders make money when asset prices increase or decrease. They take advantage of small differences in prices. The can sense the movement of an asset by the "tale of the tape."

In the 1970s, algorithmic (algo) trading began with the growth of the computer. The New York Stock Exchange used the "Designated Order Turnaround (DOT)" system to electronically route orders. The Black-Scholes option pricing model was used to dynamically trade stock index futures.

Maturity of the Trading System

Various trading strategies were developed by major banks in the 1990s, including statistical arbitrage, trend following and mean reversion. High-frequency trading strategies are gaining more popularity due to their success rates. They combine computing power, speed and large databases.

Comprehensive data sets can be analyzed rapidly by complex computer algorithms to determine the winning strategies. The computer can crunch real-time data faster than any human and execute a trade in milliseconds. It determines the chances of a future price being within a certain range.

Charts and Analysis

After 2000, the largest hedge funds were executing millions of trades in mere seconds with their black box systems. Many of these are proprietary due to their great value in returning profits. They could follow every tick.

Economics follows a certain pattern. The difficulty for most traders is that they do not see the forest for the trees. They get lost in the "now" and miss the "historical trend." A computer can analyze velocity and acceleration in real-time. Large databases of every tick of historical asset prices are now available.

Human Weakness

Most human traders suffer from weak knees and emotional bandwagon jumping. Humans buy as assets increase in price due to the feelings of euphoria. Humans sell at the bottom due to fear. A computer does not have these weaknesses.

The black box trading system calculates odds rapidly to predict future prices. Systematic trading has become mature and replaced emotional human choices. Historical data, real-time price changes and complex algorithms have returned great profits.