People use Options in order to mitigate their losses, and when that’s traded algorithmically, it’s called algorithmic option trading. Technically, algorithmic option trading follows an ultimate set of predefined instructions to take specific positions, however unlike the fully automated method, it’s more perceptive to rapidly changing market situations. When an investor opens a position, he’s not actually purchasing the product; instead, he’s speculating on how it might perform over time. This type of Trading is executed in stock exchanges, commodities, indices, currencies and a variety of other financial instruments. But how is an algorithmic trading defined?

Backtesting is a technique for effectively analyzing and testing Algorithmic Options trading strategies. A backrest is defined as an application, or tool, that allows for the testing of backtesting strategies in real time using historical data. As an example, a trader may run a backtest in which he places a single trade on an Algorithmic Options contract with a particular strike price, while not making any other trades. Once the trader observes a period where the contract did in fact perform below the initial return/risk level, he can then conclude whether his approach is successful or not. If it’s not, then he makes an adjustment, thus effectively reversing the previously successful strategy.

Algorithmic Options trading also considers the option trading strategies of the underlying assets or securities in question. The underlying assets or securities can be equity, debt, commodities, indexes, currencies, and a host of other financial instruments. Backtesting is generally executed for short terms, as opposed to long term algorithmic trading strategies, hence it’s generally used for testing new strategies before implementing them into live trading. A good way to understand how options contracts work is to understand how stock options work. An option is an agreement between the buyer or writer of the contract and the seller or writer of the contract, whereby the buyer pays a certain amount of money upfront to the seller in exchange for a right to purchase a specific underlying security at a pre-determined price on or prior to a specific date in the future.

Since option trading strategies rely heavily on the underlying asset or securities to be traded, and since these can change in price significantly over time, it can be difficult to execute options trading strategies in a timely fashion. In other words, if you’re an options trader looking to implement a profitable backtesting strategy, then you’re going to need to execute your strategy using historical data from prior periods of time, prior to the current period of time, to test how well your strategy works. This is not possible with most of the ‘forex robots’ because they don’t have the kind of time to run back tests on a regular basis, as in the case of an automated trading system. Because of this, an option trading strategy cannot be tested on a regular basis. As an options trader looking to implement an algorithmic trading strategy, the best choice for you to make is to find a free backtesting trading platform such as FAP Turbo that will backtest your strategy automatically on a periodic basis, thus maximizing the amount of testing you can perform.

The second step in implementing an algorithmic options trading strategy is to obtain a good trading book that helps you identify profitable trends and trade effectively. As previously stated,

one of the key factors in making money through options trading is identifying profitable trends and trading them. Therefore, one of the best books on the market today is “The Forex Trading Master”. This is a comprehensive, step-by-step, trading book that teaches every aspect of the markets and how you can profit by trading them effectively.

Finally, one of the keys to success with an algorithmic options trading strategy is the use of automated trading software. Trading software like FAP Turbo has made it possible for many traders to realize significant profits by doing everything from simply entering a trade to actually profiting from the trade after it’s been closed. Some traders prefer to let the software do the work while they oversee their trading accounts. Whatever you decide, be sure to find yourself a good trading software program and consistently implement it.