Algo trading or algorithmic trading is all about letting an algorithm trade on your behalf.
Once you’ve created a trading strategy backed with historical data and programmed your algorithm correctly, it will follow the plan that you have set up. That’s the greatest advantage of working with algorithms - they are disciplined.
Algorithms can take in more data and information than a human trader, which means that you can make informed decisions based on real-time data.And the best part? Algorithms don’t get tired like your manual traders. Algo trading systems work 24/7 to help you achieve the accuracy and speed that is impossible with human trading.
Moreover, algo trading is free of human errors as algorithms follow strict mechanical parameters that you have set to enter and exit trades and automate processes like position sizing.
Algorithms take quick actions; they will execute the order as soon as the signal is generated. There is no time lag. Whereas, when you trade manually, it takes time to go to the brokerage account and enter the order once you get the signal.At the same time, algorithms are perfectly disciplined and will stick to the trading plan. This means that they don’t make mistakes if you have programmed them correctly.The speed and accuracy of an algorithmic trading system are nearly impossible to achieve with manual trading.
Algorithmic trading allows you to perform automated checks and follow the markets even when you are travelling or out of office.You can also scale up your positions using algo trading. If you make a profit in your previous trade, the algorithm will automatically deploy a percentage of it in your next trade.
With algo trading, there are no human emotions involved. Algorithms are extremely mechanical and they follow strict parameters. This approach can help eliminate the emotional pitfalls that can otherwise lead to wrong trading decisions.
You can create customized robust trading programs using your knowledge of various types of trading instruments and trading strategies. Then, you can have these custom algorithms to trade on your behalf.
Human traders do not have to spend much time monitoring markets as many algorithms automatically enter and exit trades. This can help you reduce the cost of transactions.
An algorithmic trading strategy allows backtesting with historic data. You can assess and check if it will give good returns in real markets and tweak the trading strategy for better returns.You can draw down the level of loss (or win) you can make with every unit of risk. This will help you calculate how well your trades are going to perform.
OMS or an Order Management System is an electronic system designed to facilitate and manage the execution of trade orders using algo trading.
You can fill orders for various types of securities, track the progress of each order, and check regulatory compliance including real-time position monitoring of trades.
Every trade order includes details about the security identifies, order type (buy, sell, etc.), order size, order type (market, limit, etc.), order instructions (day order, fill or kill, etc.), and order transmission (broker, ECN, etc.).
You can create a multi-exchange multi-client trade execution strategy to intelligently execute entry-exit into the market using well-tested algorithms.
You can easily integrate multiple data feeds and trade in multiple exchanges. This will help you conduct effective trade order management for multiple client accounts based on a single or multiple entry trigger from multiple logics.
With customized trading algorithms, you can manage trade orders to make market-efficient transactions and get good returns.
Algo trading ensures a systematic and more disciplined approach for trading that can help you eliminate emotional pitfalls and survive in uncertain and highly-volatile markets.
You can track the progress of each order, do position sizing, and tweak your trading strategies to ensure that you get good returns in real markets.
An application program interface or an API establishes a connection between your custom coded trading algorithms and preferred broker platform. APIs help you collect real-time pricing data and place orders.
Basically, APIs are crucial to implementing an automated trading strategy. You can either use third-party applications that require access to broker APIs or develop your own automated trading systems to access pricing data and place trade orders.
A dedicated algo development and support desk helps ensure a transparent approach to managing trade orders for multiple client accounts.
You can talk to financial experts and enquire about your trade orders and progress.
Algo trading is not just about trading. You also need to have knowledge of quantitative analysis/modelling as well as programming skills in C++, Java, Python, etc.
Trading knowledge about different types of trading instruments and trading strategies is crucial in creating robust trading programs. After coding the trading idea, the algorithms are tested and optimized to generate better results by changing some parameters.
Smart and well-tested algorithms can help mitigate risks and get you good returns in real markets.
It enables investors like you to respond quickly to future markets. You can make the most of future market opportunities to generate good returns over your investment in stock trading.
With its innovative technology, algorithmic trading provides you with faster speed and greater accuracy in placing and exiting orders. You can easily program the automated platform to trade based on a set of pre-defined instructions.
Using automated trading platform for trading also allows you to eliminate or, at least, minimize human error. Algo trading uses a systematic approach for trading, which ensures that your stock trading decisions are not based on the emotional aspect of human behaviour. With a more disciplined and pre-defined trading approach, you can reduce errors and expect higher returns.
Algo trading also helps investors in price discovery and liquidity. Earlier, it focused only on the short-term, but now, it is also addressing volatility complexities and risks to help investors earn good returns.
There can be a plethora of trading strategies as per your style, however, there are few top algo strategies used by the successful traders.
One of the biggest advantages of adopting algorithmic trading is that it allows you to keep human emotions aside and trade using a strict and disciplined approach. These two factors play an important role in helping you survive in uncertain and highly volatile markets. You can not only mitigate risks but also make good profits by trading through an automated algorithmic trading platform. However, ensure that you use the right algorithms and strategies to grow your wealth through smarter, automated stock trading.
Such models are based on the simple trading method of following the trend and momentum already exhibited in the market. The decision is based on the past movement of the share which decides whether the uptrend/downtrend will continue or not.
Arbitrage is simply an opportunity that exists when the prices are different on different stock exchanges. The algo helps in leveraging such events with its fast execution, which is not possible with human trade. Since the prices are not too dispersed, the main game lies in the volume of the trade.
This strategy uses stock-specific historical volume profiles to execute the orders as close to the Volume Weighted Average Price as possible. They convert the large order into small orders and dynamically trade in the market.
This strategy refers to the reversion of the stock prices back to its average or mean. The algo trading comes into play when the prices are extreme and the trades are executed to capture the unexpected swings. The disadvantage of this strategy is when the prices do not come back to its mean in the expected time and keep on moving in one direction.
Many mathematics-based models have provided handsome returns in the past. One of the strategies is the delta neutral trading strategy which involves using options contract.
In simple terms, algo trading is making use of algorithms to structure as well as execute your trading strategies. To answer whether this works or not, put some highlights on the trading logoc.
Algo Trading is responsible for about 60-75% of global trades while 40-50% turnover of Indian cash and derivatives market which is magnificent. If you are well equipped with notable coding skills (you may also outsource this to your broker) and your strategies are rewarding, you won’t find algo trading counterproductive. Since algo trading is free of human interventions, it can turn out to be even more beneficial as compared to manual trading.
Algo trading can be immensely profitable due to several factors attached to it. Primarily, since this is technology-based trading the chances of any opportunity getting missed are almost zilch.
Secondly, the speed of order execution is unparalleled as compared to manual ones which can altogether turn the deal from losing to winning in a jiffy. Next comes the ease with which the algo trading explore prices and provide liquidity.
Finally, it comes with an advantage of no human intervention and hence no emotional conflicts whatsoever. Beyond the shadow of a doubt, algo trading can be conducive enough to be profitable in the market.
Since nothing in this world is perfect, algo trading also comes with some of the risks associated with it that can’t be ignored. To start with, the algo trading is completely dependent on your IT Infrastructure which can be problematic if the system is down due to any reason.
Secondly, the system might not be configured to digest the unexpected happenings that are a part of the stock market. One of the other risks associated is the difficulty in tracing the error once coding and optimization are completed.
For you to become a successful algo trader, you should be well-equipped with excellent software and a few necessary algo skills. Starting with the very basic of all, the skill of trading should be must, you should be trading to the core.
A few of the other skills to focus as a beginner algo trader is being good at math, understanding your software and finally programming abilities. There are some of the pitfalls that you as algo traders should avoid. Some of them are making the model too complicated, unnecessary backtesting and optimizing.
Algo trading can be done by anybody who has the upper mentioned skills and desire to accomplish. However, the popularity and demand amongst the institutional traders like hedge fund managers have no bound since it is extremely difficult for them to manage manually.
Apart from them, the retail investors, quants, and Proprietary traders are also acclaiming the algo trading especially by the scalpers and even day traders.
The importance of algo trading software lies in the fact that you put your hard-earned money in that. It becomes extremely critical for you to select a good fit.
A few of the important factors to consider while selecting the software are the availability of market data, latency issues, configurability, customization, and ease of writing programs. With the ever-increasing market of algo trading, the options have no limit.
Still, a few of the top software that you can select from are, NEST, Greek Soft, uTrade, Trade Lab API, Amibrokers, MT4, Interactive Brokers, and E-options for options trading.