Algorithmic trading or Algo trading is computer generated trading which is based on the algorithms that are fed in the trading system. It is a system of trading which aids in trading in the financial markets with the use of advanced mathematical tools. In this system, the requirement for a human’s participation is minimized which makes the decision making in financial trading very quick. This enables the system to take advantage of any profit making opportunities arising in the market much before a human trader can even spot them.
Algorithmic trading is different from Automated trading. A trader is always having the option to automate his/her Algorithmic strategy which is not mandatory. One can even carry out manual trades making use of the signals generated through the Algorithmic system generated by him/her. For automating one’s Algorithmic strategy he/she has to get an exchange approval for his/her algorithm.
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Algorithmic Trading is a system of buying or selling a financial security based on some pre-specified rules which are used to do back testing on the past data. These set of rules can be solely based on Technical Analysis or Fundamental Analysis or both. Let us take an example to understand Algo trading. Suppose, a trader is planning to buy a specific stock if it closes in Red for five continuous days. Therefore, he/she can insert such rule in the Algorithmic Trading system and can be automated as well which will enable a buy order to get automatically placed when the predefined condition is met. Along with that, the stop loss, target profit, and position sizing can be defined as well in the algorithm designed which would make trading more convenient for a person.
One has to get real-time data feed for the stock market if he/she is interested in Algo trading which is quite expensive. It is recommended to create one’s algorithm first and do the backtesting of it on old data which he/she can get for free. Once an individual is done with finalizing his/her algorithm and is pretty confident about its effectiveness, then the real-time data feed can be purchased.
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I have written the article so as to provide the readers a brief overview on Algo trading. The large institutional investors are to deal with a huge amount of shares and they are the ones who use the algorithmic trading the most in today’s era. The idea of Algo trading has become extremely popular over the last few years. The majority of trading in the USA is carried out through this and gradually India is also making a move on the same track. The Securities and Exchange Board of India (SEBI) comes up with new regulations on Algo trading for stock brokers in India require adhering. If one is willing to trade in the stock market by participating the least then he/she is recommended to open a Trading account with a stockbroker providing the facility of carrying out Algo trading.