What Is Algo Trading?

  Nowadays, many traders are shifting their manual trading style to Algo Trading and automating the trading process. Algo trading (also called algorithmic trading) is nothing but a set of instructions given to the computer to automate the trading process. Algo trading has its own pros and cons & in today’s article, we are going to discuss in detail Algo trading and its advantages or disadvantages.

How Does Algo Trading Work?

  As discussed earlier, algo trading is the instructions given to the computer to automate the trading process. In algo trading, a computer automatically executes orders on behalf of the trader.

  When it comes to algo trading, it is the biggest misconception that one should have a deep understanding of coding in order to use algo trading; this is surely not the case. You can trade using algos even if you don’t have any fundamental knowledge about trading. There are also many free as well as paid services available where you give your well-backtested strategy to them, and they do all the coding for you to make your algo work.

  It is important to know that although you can build your own algorithm and automate the trading process, manual intervention is compulsory, as full automation is not permitted for retail traders. If you use Zerodha as your broker, then they have an app called a streak, which offers traders the ability to create, backtest and deploy different trading strategies using algorithmic trading.

  In order to do successful Algo trading, you need to find a strategy that is profitable over a period of time. When you make an algorithm which is based on that profitable strategy, that algorithm will do the rest of the job for you, and this is how algo trading works.

  The big challenge in making Algo trading is to convert a well-back tested trading strategy into a computerised process that has access to a trading account for placing orders. Also another major challenge is the availability of market data that must be fed to the algorithm, as it is important to backtest the algorithm once it is built before deploying it in the live market. Also, a trader has to give access to his trading account to third-party applications to place orders from the trader’s account. Also, in the case of complex strategies, the algorithm becomes complex.

Is Algo Trading Legal?

  Yes, algo trading is totally legal in India, and according to some sources, it forms about 43% of total trades executed on the National Stock Exchange. All though there are contrasting opinions about algo trading, stating that it creates an unfair trading environment by creating a fake supply and demand zone that adversely affects the markets.

Advantages of Algo Trading-

  Algo trading comes with a lot of advantages. Following are the major advantages of algo trading-

1) No possibility of human error as the process is fully automated.

2)No human emotions involved

3) Algo trading strategies can be backtested using past market data.

4) Order placement is quick and efficient.

5) Orders are executed at the best possible prices.

6) Stop Loss placement is also automated.

Disadvantages Of Algo Trading-

  Algo trading also comes with some disadvantages, and here are those-

1) Lack of discretionary trading.

2)You may be required to share your access with other third-party applications.

3) Technical Glitch or system failure.

4) Service or maintenance costs for making and updating your algorithm in case you do not know how to code.

  So, this is how algo trading is used to automate the process by using a set of rules and procedures. Algo trading is a widely accepted technique as the process is automated, and there is zero possibility of human error; hence it is used by many institutional trading firms which trade in larger quantities with big capital.

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Happy learning!

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