Algorithmic trading (Automated trading) is a legal trading practise in India since 2008. Today more than ⅓ of the stock market is involved in algorithmic trading techniques. Algorithmic trading in simple words is automatic trading by computers based on the preset parameters.
PARAMETERS USED IN ALGO TRADING
They include historical events, stock specific price movements, volatility, volume of stock trading, current market situation, risk appetite (margin), indicators and pattern identification, resistance and support levels, etc. Hence by coding all your specific requirements you can ask the computer or software to trade on your behalf if the price set by combination of your strategy gets hits.
Also there can be several test runs for knowing the effeciancy of a strategy. Such a test run is knwon as Back-testing where you run your strategy against historical data and study the outcomes.
IMPORTANCE AND ADVANTAGES OF ALGORITHMIC TRADING
Algo trading erases two very important drawbacks of manual trading. One is Greed and the other is Fear. Stock market is not only about the movement of stock prices but also about the psychological effects on the human brain.
Many times the person cannot keep the entry and exit points as decided before execution and sell the shares at a loss due to a constant hope in his mind about recovery. For this hope the word which people refer to is FEAR.
When a person is profitable in a trade he always tends to earn more from that. Though there is a level of breakout or resistance which any sane person could figure out he always wants more and stays in trade for earning more. This situation is termed as GREED. Algo Trading takes care of this situation.
Algo trading is beneficial because it can keep check on hundreds of changes in market at one time. It views all these parameters together and thats why it is easy to know the exact entry and exit points.
ALGO TRADING PLATFORMS
Small traders are using Algo trading softwares nowadays but they use only 5-10% tools of the entire mechanism. There are a lot of softwares which provide algo trading facilities. Among all of the softwares algo trading by Zerodha Streak is used the most by traders. Streak enables a person to create various strategies based on their 200 DMA, 50 DMA etc. It also enables to create a strategic portfolio to keep the losses and profits in a balanced situation. Streak has tutorial lessons of algo trading for beginners as well. Other Algo trading platforms in India are Metatrader 5, Interactive brokers, Algo trader AG, VIRTU financial, etc.
DISADVANTAGE OF ALGO TRADING
The biggest disadvantage of algo trading is that traders don’t get much to say when it comes to advanced algorithms. Various big firms such a Morgan Stanley, Motilal Oswal have their own algorithms developed to create a balanced portfolio of risk and reward and this affects the market spirit of equality. All the people who invest or trade should have access to similar technology so that everyone can get the reward based on their knowledge and intellectual and algo trading affects that spirit of the market. However the traders are also showing interest in such platforms to take advantage of technology and so the day is not so far when people would be completely relying on algo platforms for execution of trades.
GROWTH AND UTILITY
It is also estimated that algo trading in Indian stock market would grow at a CAGR of almost 12% from 2020 to 2026. Primararily a lot of coding was done for performing algorithmic trading. But nowadays due to advanced softwares no one needs to do any coding work. All a person needs to do is to create strategies and put theminto action. Algo trading is a very useful technique due to its speed and accuracy. A good strategy can genearte handful sum of profits.