You might have come across the term “algorithmic trading” and have wondered what kind of complexity it is. Believe it or not, if you know about technical analysis, algorithmic trading is just a cakewalk for you, so what exactly is it?
Algorithmic trading is a method by which you can execute orders using pre-programmed trading instructions regarding time, price, and volume. These instructions can be selected from a wide range of options available or written.
When the market conditions meet the predetermined criteria, the trading algorithm produces buy-sell orders on your behalf, just as you would if you were placing an order manually.
These conditions can be anything based on indicators like RSI, moving average, Bollinger band, etc. based on various charting time frames.
Let’s understand with an example:
Suppose you want to buy 100 shares of a stock when its 100-day moving average rises above the 200-day moving average and sell 100 shares of a stock when it falls below its 200-day moving average, and your target is 20% profit from the entry price with a Stop Loss of 5%.
Using this set of simple instructions, a computer program can be written that will automatically monitor the stock price, as well as its moving average indicators, and place the buy and sell orders when the predefined conditions are met. There is no manual intervention required here. The trader no longer has to monitor the live prices and graphs or place orders themselves. This algorithm efficiently completes its tasks for the trader.
Algorithmic trading is also used for High-frequency trading, also known as HFT, it is a method of trading that uses powerful computer programs to transact a large number of orders in fractions of a second. It uses complex algorithms to analyze multiple markets and execute orders based on market conditions.
In addition to the high speed of orders, HFT is also characterized by high turnover rates and order-to-trade ratios.
With the help of algorithmic trading, you can do whatever comes to mind, whichever method you want to use while taking your positions in the market.
Let’s have a look at the advantages of algorithmic trading:
- You get the best price along with immediate and precise entry and exit. For e.g. you want to buy whenever the price of a particular stock crosses the 200 days EMA, the algo will trigger a buy order when this condition is met.
- Automated checks on multiple market conditions. Say, you want to but a NIFTY Call option when 50 days moving average crosses above 100 days moving average and 200 days moving average.
- The risk of having manual errors while placing the trade is less. Let me share with you one real-life experience while trying to place the trade for the put option I accidentally bought the call option.
- No risks due to traders’ emotional and psychological factors. This is one of the biggest advantages algos are neither over-confident nor under-confident, they are neither greedy nor fearful.
- Multiple trades can be executed at the same time without having to place them one by one. If you want to place multiple trades say across stocks you can easily do it as there is no human intervention, trades will be executed when the conditions are met.
Different Algo Trading software will come with different user interfaces, some might be easy to understand and execute while others can take a certain amount of time for you to master.
You can review the following algo trading platforms to check which one suits you the most.
- Zerodha Streak
- Algo trading by 5paisa
- Angel Broking Algo Trading Softwares
- Alice Blue Algo Trading Softwares
The success of your trade will be determined by your experience and knowledge; sometimes what may appear to your eyes, will not be visible to the algorithm such positions need to be executed manually.
Writer: Suraj Kar
To learn more, get our Journal: PW Insider for FREE!
Read Next: IoT: Internet of Things
For more information, reach us at [email protected]