Rule based trading: How to start?

In the previous chapter of this module, we saw what rule based trading is and how it can help elevate your trades. Now that you’ve gotten a good grasp of this trading technique, it is time that we looked at what you should do to get started. And that’s what we’re going to cover in this chapter of Smart Money.

How to start rule based trading?

To get started with rule based trading, it is important to first know what you need. Getting to know the prerequisites for starting rule based trading is really important since it will help you stay prepared. So, let’s begin.

1. Brush up on your statistical skills

Fundamental and technical analysis can help you go a long way when it comes to regular trading. However, when it comes to rule based trading, it may not always be enough. Statistical analysis, quantitative modeling, and time series analysis are a few of the skills that you would need to pick up in order to excel at rule based trading.

Since they feature quite extensively in rule based trading, it is important to be adept at these new skills. There are a lot of free online resources that you can use to gain knowledge in these domains. Also, while you’re at it, it is advisable to also get to know the ropes of how to navigate and use statistical software such as Matlab and R for quantitative modeling.

2. Read up on programming languages

Another major skill that you would need to pick up to be able to start with rule based trading is proficiency in programming languages. Since rule based trading involves the creation of rules and algorithms, you would need at least a working knowledge of programming languages like Java, Python, and C++.

Though some trading platforms have made rule based trading easier with their very own rule based trading platforms and pre-loaded algorithms, it is not always a good idea to fully rely on them for everything. It is always advisable to be proficient in programming languages. It will help you modify existing algorithms to suit your trading requirements and will put you in a better position to code your very own algorithm as well.

That said, before you go ahead and start reading up on them, ensure that the trading platform that you’re about to use for rule based trading supports the use of these languages.

3. Invest in a fast computer

If you’re an individual who trades on the go through mobile devices, then it is time that you invested in a fast computer. Rule based trading is very resource intensive and requires a lot of computational power. This is especially true when using specialized statistical software like Matlab and R and compiling programs.

Small devices such as your mobile phone or your tablet may not support these functions. And even if they do, they may not always be able to execute them to your satisfaction. Here’s where you need a powerful computer or a laptop to speed things along. With such a device by your side, you can not only get your rule based trading going much faster, but can also prevent unwanted errors and other niggles hampering your experience.

4. Get a fast internet connection

Mobile internet or a regular broadband connection may be enough to get the job done when it comes to trading manually. However, with rule based trading, it surely won’t cut it. You would need a fast and stable internet connection to ensure that your rule based trading goes on smoothly without any delays or hitches. With a slow internet connection, you may not be in a position to take advantage of small price changes and arbitrage opportunities, which typically last for only a few seconds or minutes. 

Also, one of the most important things that you need for executing rule based trading strategies is a tick-by-tick market feed. It is basically real-time market data that shows every single buy and sell order for a stock and market movements. You can get this data from the NSE, albeit for a small fee. Since the volume of data of such market feeds tend to be far larger than regular feeds, you would need an exceptionally fast internet connection.

Wrapping up

Well then, that’s about all that you would need to get started with rule based trading. Once you’ve mastered all the required skills and satisfied all of the prerequisites, all that’s remaining for you to do is to start setting up your rule based trading strategies.

A quick recap

• Statistical analysis, quantitative modeling, and time series analysis are a few of the skills that you would need to pick up in order to excel at rule based trading. 
• Another major skill that you would need to pick up to be able to start with rule based trading is proficiency in programming languages.
• Rule based trading is very resource intensive and requires a lot of computational power. This is especially true when using specialized statistical software like Matlab and R and compiling programs. 
• You would also need a fast and stable internet connection to ensure that your rule based trading goes on smoothly without any delays or hitches. 
• Also, one of the most important things that you need for executing rule based trading strategies is a tick-by-tick market feed.