Algorithmic trading is a pre-programmed trading instruction consisting of time, volume, and price. It is known by different names, black box trading, automated trading, or Algo trading. Algorithmic trading came into existence in 2008 and was used to automate bulk market trades with speed and accuracy. The software performs a set of instructions to generate quick profits and unbelievable speed that is almost unimaginable by human traders.
Understanding Algorithmic Trading Practices
The use of formulas executes the trade orders. It is ideal for bulk orders. Algorithmic trading prevents human error that occurs during manual trading. When it comes to trading, speed matters; else, you stand to lose money. With Algo trading, this can be avoided. First movers buy or sell in a flash before even a manual player realises it. The trader can focus on other core activities like data analysis and lead generation while the actual trading is automated.
Types of Strategies adopted by Algo Trading
Every algorithm has a purpose, and each is formulated keeping specific goals in mind. Some of the strategies include:
- Following the trend
- Mean reversion or mean reverting Algo trading
- Momentum trading
- Butterfly spread or Arbitrage strategy
The pre-programmed instructions help to buy, sell or retain assets in a pre-programmed mode.
What do you need for Algo trading?
You need a computer with an internet connection. Programming languages like Python and C++ are used as it comes with statistical libraries. Market information is received from external sources. They provide a real-time data feed, including predictive prices. With live data feed, you can stay ahead in the race, giving you several minutes of advantage to take a trading decision.
Legalities of Algo Trading
Not all countries support Algo trading. It is illegal in some countries, so pay attention to the laws before practising it. Sometimes, Algo trading may lead to trading signals that may influence the market beforehand. Though Algo trading is legal, when it comes to insider trading, it could be a criminal activity.
Why should you use Algo trading?
- It is very useful for big traders who deal with bulk trading
- It is a pre-programmed application or formula to initiate buying and selling in the stock market with accurate timing
- Automated buying and selling without the intervention of humans
- Time to earn quick profits from the stock market, forex, and crypto market
How does it work?
Before getting into the process, it is important to understand scalp trading. Rapid purchasing and selling with the aid of technical analysis are called Scalp Trading. The traders in scalp trading automate the entry and exit of the shares.
Having the right strategy that is time-tested in place is the key to the successful application of Algo trading. Once the strategy is tested again and again successfully, it is applied to a formula and converted into an algorithmic program; once examined and approved by the exchanges, it is put to use.
There are many advantages of Algorithmic Trading, read on to know a few:
- Speed is the essence of trading, and this can be achieved with the help of Algo trading. You can execute the order at the exact price.
- 2. Multiple indicators are used to execute orders that can be carried out without human intervention.
- The algorithms are verified time, and again, so the trading becomes precise. The risk of wrong trade is avoided.
- Algo trading is free of emotional trading as it does not have human intervention. The program is set, and the trades are executed by invoking disciplined trading.
- Several trades can be executed within a short period of time, and it saves on transaction costs. There is no need to keep track of the trade shifts as the Algo trading takes care of it.
- Market liquidity is taken care of by Agro trading as you have the option to trade large share volumes in a jiffy.
Algo trading gives you the advantage of worry-free trading as it comes with stronger strategies giving you complete confidence to embark on your trading journey.
_Assigned to Rishabh Singhal_