As I was sitting down to write about this topic, it occurred to me that the subject can relate to two different topics unless you add the word “YOUR” to Algorithmic.

Without the word "your," the topic can also relate to how one can identify algorithmic actions in the market by others. By adding the word “your,” I am going to focus on how one can decide on his or her algorithmic trading approach.

This topic is an important one for traders because it starts with the main question: Who are you as a trader?

To get to the answer, you must ask yourself a few specific questions:

1. What is my risk tolerance?

Can I take being under in a trade for X amount of $$? How much risk capital do I have?

2. Does my personality allow for swing trading or perhaps only day trading?

3. How much time do I have for this project? How much time do I have for trading?

4. How tech savvy am I?

Can I design and write my own code? Will I need to hire someone to do this for me?

Based on the answers above you can jump into the project of creating your futures trading strategy and perhaps even making it an automated commodity & futures trading system!

Algorithmic trading strategies can be as complex as lengthy codes that explore studies and correlations between different markets, different time frames and more. They require computer processing power to do something as simple as buying on a breakout above yesterday’s high and selling on a breakout below yesterday’s lows.

The first step I recommend is to read and investigate different ideas from other traders. Sometimes it's not about inventing something new, but taking something and making it better.

My 5 steps recommendation is as follows:

1. Identify the basic concept you feel suites your risk capital and personality. Can you actually mark it on the chart? Is it a condition that is very visible and can be quantified?

2. Find out if you can use a computer program to back-test the entry signal. Do you need to create an Excel file and manually review hundreds of charts to see if the concept has validity?

An example is CQQ Software has an "entry signal evaluator," which is my first step whenever I think of a new idea for a trading system.

3. If the entry signal has validity, I like to simplify by looking at two main factors:

Either a high winning percentage rate or a signal that has potential for winners that are much larger than the losers.

4. The next step is to actually design a futures trading system. Whether you will execute it manually or try to have an automated trading system depends on your programming ability, time and money.

Either way you will need the following:

A. Entry signal

B. Exit signal

OR

C. Many in between or none.

You can have trailing stops, breakeven stops, targets, other conditions, time exits and much more. Or you can simply have an entry signal, a stop (or not if, you are crazy), and a target profit.

5. After that, run this in simulation mode going forward.

Here you will find out all kind of interesting factors upon which you may have to work. Slippage? Trading fees? Realistic in the real world? What work you may need to do still before going live?

6. If you made it thus far and are happy with the results, it is time to trade it live… small scale. Keep notes and stats.

7. Periodically review performance and adjust system parameters to reflect latest market conditions, etc.

8. Last but not least: Now that you have a commodity algorithmic trading system, you need to control your emotions. Trust your work and let it run!