With technology automating every sector in the world, stock trading is no more exception. Technology has drastically changed the way we trade. In the world, 50% of total trading is done using the algorithmic method. Computers have taken over the human brain as far as the solving problem is concerned. In today’s era, the same trend has been seen while trading in the stock market. Trading in stock markets has been done for centuries but with the introduction of computers and complex mathematical calculations, trading has taken a new form which is called Algorithm or Algo Trading.
1) What is algorithm trading?
In computers’ world, an algorithm is a step-by-step flow to make a system work in a specific way to achieve a goal without much human intervention.Algorithm trading is the process of automating one’s trading strategy ( A trading strategy is the method of buying and selling in markets that is based on predefined rules used to make trading decisions ). With algorithm trading, and without much human intervention, we can generate profits at a speed and frequency unachievable in manual trading. Computerized and electronic platforms are used by the algorithms to make trades. Orders are executed by the computer without human intervention, resulting reduction in speed of execution
Lets understand algorithm trading with the help of an example?
Suppose, you want to buy shares of tata motor when it is below its 20 day moving average, then you don’t need to sit in front of screen all the time just looking for moment of buying when price of tata motor reaches below its 20 day moving average. Algorithm trading makes it simple for you, you just have to make program/algorithm as per your strategy and rest everything (buying and selling of shares) is done by algorithm. Once the algorithm detects an opportunity according to the rules coded, it can then decide to place the trade for you in a fully automated system, or alert you about the trade by notification after which you can choose to enter the trade manually by keying it in at your broker’s terminal.
2) Scope of algorithm trading?
Algorithm trading might sound new to Indian Markets but this has been used in the U.S. since the 1970s and by the end of 2010, almost 60% of trading in US was done using computers. In india Algorithmic trading has gained a huge popularity from last decade and accounts for around 40% of Trading volume in india. Retail traders don’t like and move away from Algorithmic Trading considering it complex and out of reach.But it’s not true, learning and building an algorithmic trading system can be a very simple task if one knows the fundamentals behind it.
3) How algorithm trading works?
Algorithm trading uses computer codes and chart analysis to enter and exit trades according to the pre – defined parameters such as price movements or volatility levels. Once the current market conditions match your coded strategy, algorithms can execute a buy or sell order on your behalf. Algorithm trading saves your time of scanning the markets, and it means that your trades are executed almost instantly.
For example you would like to buy the share when the price has crossed its moving average of 14 days and you just need to make algorithm and rest buying of shares will be done by algorithms.
4) How to do algorithm trading?
- Write a profit earning strategy
- Back test your strategy number of times to see if it would have made money
- once finalized, use brokers algo trading platform for coding/programming of your strategy.
- Enjoy emotionless automatic trading
5) Why to choose algorithm trading?
Psychology plays an vital role in one’s success and failure in stock trading. Generally controlling emotions (greed and fear) seems like a big challenge to retail traders. But the introduction of Algorithm trading has made the stock trading free from emotions since decisions to carry out each trade are made in an automated systematic manner. Therefore algorithm trading is also known as emotionless trading.
Algorithm trading is a very competitive field in which technology is a crucial factor.• With the help of the algorithmic trading system the stock trading activity becomes faster. But after all it is totally depends on the technology, So one has to not depend fully on the algorithmic system.Its very crucial to understand basic of stock trading before directly jumping into algorithmic trading.