Python for Algorithmic Trading: You Need to Try This

If you’ve got a passion for both programming and trading, you’re in the right place. It’s likely that you’ve already at least thought about putting the two together. If you haven’t, you should definitely give it some serious consideration. Algorithmic trading has been transforming the world of finance for decades, and Python is at the forefront of this revolution.

While I put off learning Python for years, I’ve gotten more into it recently because of the ease of developing algorithms with it. The language isn’t the hardest to pick up, and it is built for data science, which is convenient for us. Even if you’re a novice with programming, Python offers a gateway into this exciting realm of algorithmic trading.

In this guide, we’ll explore why Python is the language of choice for algorithmic trading and how you can leverage it. Anxious to get started? I highly recommend jumping right in with something when it comes to programming. You can design, test, and implement trading strategies, all without risking a cent. There’s absolutely nothing to lose as you learn all about python and algorithmic trading.

From the basics of Python and trading platforms to example trading strategies, I’m going to try to cover it all. Lets get started!

What is Algorithmic Trading?

At its core, algorithmic trading involves the use of computer programs to execute trading operations based on predefined rules or algorithms.

When we work on systematic trading, we (hopefully) design rules and a structure for how we want to trade. When facing certain situations, having these rules allows us to eliminate much of the guessing and stick to predefined decision-making processes.

Trading algorithms are designed to make similar decisions based on variables such as timing, price, and volume. This shift from manual to algorithmic trading brings so many advantages, I don’t think there’s any reason not to try. Increased execution speed, improved accuracy, reduced costs, the ability to analyze vast amounts of data – humans simply cannot keep up with what a good trading algorithm can do after a certain point.

These algorithmic trading strategies can be extremely simple, or complicated. It’s up to you. It might be as basic as buying a particular stock at a pullback of a certain percentage. Or it might be as complex as high-frequency trading using machine learning and a more dynamic analysis of data.

Regardless of its complexity, the goal of a trading algorithm is to automate the trading process and reduce the impact of human emotions on trading decisions.

So Why Python for Algorithmic Trading?

Python has emerged as a go-to language for algorithmic trading for several reasons. First, Python’s simple syntax and readability make it a great language for beginners. Its extensive library ecosystem simplifies quite a lot, and this means it can be a huge time saver when compared to several other well-known languages.

Python also integrates well with various trading platforms through APIs, enabling automated trading. It has strong support for array computing, data manipulation, and technical indicators. All of this just makes it ideal for creating and backtesting trading strategies.

Finally, Python’s massive community ensures you always have access to a wealth of resources and forums for learning and troubleshooting. Thus, if you’re new, you won’t be stuck on any single problem for too long.

Key Python Libraries for Algorithmic Trading

Python’s power comes from its libraries, and there are several essential libraries for algorithmic trading.

Pandas, for example, provides high-performance, easy-to-use data structures and data analysis tools. Numpy facilitates mathematical and logical operations on large data sets. Matplotlib is excellent for creating static, animated, and interactive visualizations in Python.

For getting financial data, libraries like yfinance and pandas-datareader can prove quite handy. I was able to extract forex market data using yfinance in just a few lines of code. It helped me get some basic practice when developing my first algorithms in python.

Look how easy it is in Python to print 1 hour candle data with pandas and yfinance:

import yfinance as yf
import pandas as pd

ticker = "GBPUSD=X"

# Download historical data
data1h = yf.download(ticker, start="2023-04-15", end="2023-06-10", interval='1h')

# print data to console
print(data1h)

Other libraries like PyAlgoTrade and Backtrader are designed for backtesting trading strategies, offering an easy way to see how a strategy would have performed over a specific historical period.

Trading Platforms and APIs

Many online trading platforms offer APIs that integrate with Python, providing access to real-time and historical market data. As long as you can successfully connect and extract data from some API and place trades, you can make a trading algorithm.

Not all brokers offer this, but there are plenty that do. Some of the most popular include Interactive Brokers, OANDA, and Alpaca. Each platform has its own Python SDK (Software Development Kit) that facilitates interaction between your Python code and the platform’s trading functions and data. This means that it is all set up for you to easily start executing trades as soon as your code is ready.

Examples of Algorithmic Trading Strategies in Python

The simplicity of Python is one of its biggest draws for data science. If you’re unfamiliar with technical analysis, I strongly recommend checking out some of the articles I’ve written regarding technical indicators, candlestick analysis, and more.

A beginner-friendly example is the Moving Average Crossover strategy. This strategy uses two moving averages, one short-term and one long-term. When the short-term moving average crosses above the long-term moving average, this strategy generates a buy signal. Conversely, when it crosses below to the downside, the strategy generates a sell signal.

This strategy simply suggests that the recent price movement is showing momentum to continue trending above or below the longer term averages, depending on where the crossover happens. It’s far too basic to generate much money (or any) consistently, but it’s a great way for you to get started. Seeing the way these signals get generated will help you think more about what it takes to build a reliable strategy.

Preparing for Algorithmic Trading

While Python is a powerful tool for algorithmic trading, success in the field involves more than just coding. An understanding of financial markets, trading principles, and statistical analysis is crucial. It’s also important to recognize the inherent risks in trading and to build your algorithms with risk management in mind.

All of this is not possible without spending some hours in front of the charts and performing your own analysis. Most active traders have this part down, but if you’re new to trading, you mustn’t overlook it.

So take some time and educate yourself about different trading strategies and financial instruments. Learn about risk management techniques such as stop-loss and take-profit orders, position sizing, and diversification.

Remember, algorithmic trading isn’t about getting rich quick; it’s about systematic, disciplined, and repetitive trading. The power is in compounding the wins without letting your emotions interfere. Once you’ve got a good strategy, test it over historical data and see if a computer would have traded it as you do.

Backtesting

Whatever you do while preparing to set up your algorithm, do not forget about backtesting. Backtesting is a critical step and cannot be overlooked. This involves testing your trading strategy against historical data to see how it would have performed over a long period of time.

Python makes this easy. You can see how your algorithm would have done from 2010 to 2020, for example. Just make sure your data source provides reliable data from the dates you request.

Backtesting properly will help you identify potential issues in your strategy. The market might be trading more slowly than recent years. It might have had more volatility in one year and less in another. To be successful, you’ll have to optimize your strategy to account for these variations.

Further Resources and Learning

Numerous resources are available for those interested in learning more about Python for algorithmic trading. Online courses on platforms like Coursera, Udemy, or DataCamp provide structured learning experiences with interactive coding exercises.

If you’re like me and prefer using books for more reliable examples than a google search, consider some of these:

“Python for Finance: Mastering Data-Driven Finance” by Yves Hilpisch – The book not only covers Python programming basics but also how to use Python to analyze financial data and implement trading strategies.

“Algorithmic Trading: Winning Strategies and Their Rationale” by Ernest P. Chan – While this book isn’t Python-specific, it is a great resource for understanding the theory behind various algorithmic trading strategies. The author also provides examples in Python and MATLAB.

“Trading Evolved: Anyone can Build Killer Trading Strategies in Python” by Andreas F. Clenow – This book is perfect for beginners who want to understand how to use Python in the context of trading. It includes step-by-step guides on how to build trading strategies.

“Machine Trading: Deploying Computer Algorithms to Conquer the Markets” by Ernest P. Chan – A comprehensive guide on how to implement algorithmic trading strategies using Python, with a special emphasis on machine learning.

“Advances in Financial Machine Learning” by Marcos Lopez de Prado – Although this book covers more advanced topics, it’s great for traders interested in using machine learning algorithms for their strategies. Python code examples are provided.

In Summary…

Python brings the power of algorithmic trading to your fingertips. Its easy-to-read syntax and variety of libraries make it easier for you to get started with limited experience.

However, remember that successful trading still requires a solid understanding of financial markets and sound trading principles. Being a good or even great coder is not enough to build a successful strategy. Millions of people are trying to find an edge everyday, and that is your competition every time you work on your trading algorithm.

Don’t be discouraged, but don’t expect it to be easy either. It will take preparation, ongoing learning, and disciplined risk management, just like trading manually.

But unlike trading manually, this takes a slightly different approach in that you can’t wing it. If you don’t test it thoroughly, you will most likely never make any money from a trading bot.

The advantage, however, will be that once you have your strategy set up, you can rely on your PC to be unbiased. It will not exhibit any of the normal discretionary trader’s fear or greed (beyond what you implement in your code, of course). This might revolutionize trading for those of you who are struggling with emotions and sticking to your plan when markets get chaotic.

As I get more acquainted with Python, I’ll surely write more about my own experience with the progress of my trading algorithms. If you’d like to see a more in-depth tutorial, feel free to request it or ask other questions below.

In the next article, I will go over setting up your first algorithm using the Oanda API.