Algorithm

What is an algorithm?

In mathematics and computer science, an algorithm is a step-by-step procedure for calculations. Algorithms are used for calculation, data processing, and automated reasoning.

Algorithm for Momentum, Relative Strength, Trend Following

An algorithm is a step-by-step procedure for calculations. Algorithms are used for calculation and data processing. An algorithm is a completely defined process, finite sets of steps, operations, or procedures that will produce a particular outcome. For example, with a few exceptions, all computer programs, mathematical formulas, and (ideally) medical and food recipes are algorithms.

A complete quantitative trading system is an algorithm. The program is a series of rules and steps that predefine risk and determine the next step as price trends evolve.

Here is a simple algorithm example:

Is the price higher today that it was 30 days ago?

  • Yes= the trend is up, stay in it.
  • No= the trend is down, exit.

It can get far more adaptive and complex. For example, there would be multiple time frames or it could then be compared to other alternatives. The advantage of developing and operating such a decision making system is that we can think of every possible scenario and predefine and answer for it, rather than waiting and making a decision under duress.

Another advantage is that once we have defined all the rules, steps, and processes, we can test them scientifically to determine how it would have acted and what results would have been created. Since I have completed this process thousands of times over many years, I have a strong understanding of how markets interact and how systems work in different conditions.

For questions and comments, contact me.

From Wolfram: An algorithm is a specific set of instructions for carrying out a procedure or solving a problem, usually with the requirement that the procedure terminate at some point. Specific algorithms sometimes also go by the name method, procedure, or technique. The word “algorithm” is a distortion of al-Khwārizmī, a Persian mathematician who wrote an influential treatise about algebraic methods. The process of applying an algorithm to an input to obtain an output is called a computation.

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