If you are someone interested in trading in the capital market, there is a high probability that you have come across the term Algo Trading. It might make you wonder what this is. Let us look at some basics to understand it better.
What is Algo Trading?
Did you know that in reality, a trade could generate profit margins at a pace that is impossible for humans? In addition, if you are planning to open a trading account you can give algo trading a shot. Introduced to the Indian stock market back in 2009, algorithmic trades, commonly known as Algo trading, use computer technology for trading based on a defined set of commands also known as algorithms. In the recent past, Algo trading in India has witnessed rising interest in the share market from both domestic and international investors. Apart from profit opportunities for the trader, algo-trading aids in making markets more liquid and trading more systematic by eliminating any kind of emotional involvement in trading activities.
Benefits of Algo trading
Algo trading has its benefits as this kind of trading solely works on algorithms, thus omitting any form of human intervention. At times, we as humans tend to get overwhelmed by emotions that may lead us to taking risky trading decisions thus incurring huge losses. That is why algo trading is the best trade practice method as it omits any decisions being made under any psychological influence with minimal human involvement. In algo trading, simultaneous autonomous market checks are made to execute trades at the best possible prices. The biggest advantage of algo trading in the introduction of high-frequency trading (HFT). High-frequency trading manages to place a large number of bets at an extremely high speed in several markets, based on multiple algorithmic decision parameters.
Algo trading strategies
Here are the most common trading strategies used in algo trading:
Trend following strategies
In algorithmic trading, trend following strategies are the easiest and simplest strategies to execute through because these strategies do not involve making any predictions or price forecasts.
This refers to implementing an algorithm to identify profitable price differentials within several markets and placing orders efficiently, thus allowing risk-free opportunities.
This type of strategy refers to categorizing and defining a price range and implementing an algorithm based that permits trades to be placed robotically when the price of an asset breaks in and out of its definite range.
Here are the technical requirements of algo trading:
First, you need to have familiarity with computer coding languages to program the required trading strategy or readymade trading software. You must also have access to trading platforms and internet access to place orders. Access to market data feeds that will be monitored by the algorithm is mandatory too. You must also know how to back-test the system before it goes live in the actual markets. Available historical data for back testing depends on the intricacy of rules bestowed upon in the algorithm. The more complex an algorithm, the more rigorous back testing is needed before it is put use in the real world.
Algo trades help seasoned investors intensify the efficiency of trade execution and spot fleeting trading opportunities. If you are a dedicated investor, you must make it a point to try algo trading. The improvement of efficiency in your trades is likely to surprise you.