Basics of Algorithmic Trading: Concepts and Examples

21 Feb, 2022

7 min read

2002 Views

icon
The algorithm can be based on a variety of factors such as pricing, timing, quantity, and other variables. Market participants gain from algorithmic trading in a variety of ways.

Trading's version of artificial intelligence, algo trading, algorithmic trading, or automated trading, is the next big thing. Let’s explore and examine the limitless options and possibilities that Algo Trading has to offer, with the promise of being quick, accurate, and huge.

Definition of Algorithmic Trading and Its Importance

Computer-generated algorithms are used to conduct trades in Algo trading, where computers supervise operations (called programme sets) that would normally be performed manually by a trader. Algo trading, in its most basic form, is a computer programme that determines and performs the human stages in trading as a predetermined set of instructions. These sets are based on a variety of factors, including time, price, number, and mathematical models. According to The Cost of Algorithmic Trading: A First Look at Comparative Performance, algorithmic trading is particularly advantageous for big order sizes, which may account for up to 10% of total trading volume.

In India, algorithmic trading accounts for less than half of all trade, and businesses are often tiny. Pure arbitrage accounts for a considerable portion of Algo-trading volumes (trading between the National Stock Exchange or NSE and BSE, for instance).

However, complicated Algos will eventually take over the Indian stock market. Given the fast rising trend and demand for HFT and Algorithmic Trading in developing economies and emerging markets, numerous exchanges have made efforts to educate its members and build the necessary skill sets for this technology-driven profession.

The Advantages: What makes it better?

Making the trading process automated allows traders to monitor even the tiniest price fluctuations and make deals on-the-fly, far quicker than they could otherwise. This aids in increasing order entry speed, diversifying trading systems by allowing users to trade numerous accounts or strategies at the same time, and maximizing the opportunity to distribute risk across many instruments while generating a hedge against losing positions.

Furthermore, an algorithm like ours can search for trading opportunities across a variety of marketplaces, place orders, and track transactions. Our Algo trading systems may produce orders as soon as trade parameters are satisfied since a system can adapt instantly to changing market circumstances.

 

To put it simply:

If you're a Mid- to Long-Term Investor, you may buy stocks in bulk if you want to invest in the market in a methodical way with discrete, large-volume transactions. You may establish liquidity and automated trading as a Short-Term Trader, which allows you to take advantage of automated trade execution.

 

What are the disadvantages? What are the costs and benefits?

Algorithms also have a relatively limited lifespan. They are as excellent as they can be for implementing mundane strategies, but the customizability is gone. When numerous orders are performed concurrently without human interaction, the speed of order execution, which is advantageous in most cases, might become a problem. It is quite likely that the techniques devised on paper will not be useful and effective when used in actual trading. This is known as over-optimization, and it occurs when a trading strategy becomes unreliable in real-time markets. Despite the fact that tactics are based on previous data, there's a good chance they'll fail as soon as they go live if the correct approaches aren't used! Not every strategy can be mechanized and translated into a computer programme. As a result, such tactics cannot be used in Algo trading.

Damage Control: How can I minimize the drawbacks while maximizing the benefits of Algo Trading?

As automatic as Algo trading may be, it still necessitates ongoing and persistent monitoring, therefore an Algo trading platform isn't as important as the team of professionals that can help you make the most of it.

Algo Trading Strategies

After back testing several techniques and establishing whether or not they may be lucrative, a viable algorithm is constructed.

If you trade manually as a novice, you risk making errors and losing money. After a series of losses, you begin to question your financial tactics and judgments. The fact that Algo-trading is emotionless is its major benefit. Regardless of whether a human makes a profit or loses money, the algorithm continues to trade without emotion until it is told to stop.

With the aid of Algo-trading, high-frequency transactions may be executed in milliseconds. It's much better to trade algorithms if you trust the back testing process since it offers you an idea of how a strategy might operate if it had been applied in the past. Scalable model- Algo trading offers a scalable approach that allows newcomers to invest in a big number of lots at once. When trading manually, investing and maintaining a big number of lots becomes quite tough. Algorithms allow you to invest in a huge number of lots at the same time.

To take and close positions, a trader does not need to sit in front of the computer all day. Without having to sit in front of a computer, all of the procedures may be completed using algorithms. You won't have to worry if you can't trade for a day or two since the machines will do it for you. In the stock market, Algorithms account for over 65-70 percent of trading. And it is likely to reach 90-95 percent in the near future, indicating that algo is producing good rewards for investors.

Beginners may easily carry out trading operations using algo trading without any difficulties or extended trading hours. Experts feel that algo trading has a bright future and that it may help people earn a lot of money. Algo trading removes greed, fear, and emotions from trading and executes transactions that would be impossible to execute manually since humans are incapable of functioning without emotions, fear, and greed.

 

Disclaimer: This blog is exclusively for educational purposes and does not provide any advice/tips on investment or recommend buying and selling any stock.

How would you rate this blog?

Comments (0)

Add Comment

Related Blogs

  • icon

    Top 10 Most Inspirational...

    27 Apr, 2022

    7 min read

    READ MORE
  • icon

    Preference Shares:...

    17 Mar, 2022

    6 min read

    READ MORE
  • icon

    IRCTC Stock and Share Split

    03 Dec, 2021

    7 min read

    READ MORE
  • icon

    Nirmala Sitharaman’s Success Story

    26 Mar, 2022

    5 min read

    READ MORE
  • icon

    ​​Dr APJ Abdul Kalam:...

    14 Apr, 2022

    5 min read

    READ MORE
  • icon

    What is Pre-Market...

    10 Feb, 2022

    6 min read

    READ MORE
  • icon

    10 Day Trading Strategies...

    28 Dec, 2021

    4 min read

    READ MORE
  • icon

    Mark Zuckerberg's Success...

    25 May, 2022

    5 min read

    READ MORE
  • icon

    ​​Dhirubhai Ambani’s Success Story

    07 Mar, 2022

    7 min read

    READ MORE
  • icon

    Aman Gupta: Success Story...

    17 May, 2022

    5 min read

    READ MORE
  • icon

    Futures Options Strategy Guide

    19 Jan, 2022

    8 min read

    READ MORE
  • icon

    Is Google a Good Investment?

    11 Nov, 2021

    8 min read

    READ MORE
  • icon

    Why Gold Rate is...

    13 May, 2022

    5 min read

    READ MORE
  • icon

    A Beginners Guide To...

    02 May, 2022

    7 min read

    READ MORE
  • icon

    Ratan Tata's Youngest...

    15 May, 2022

    4 min read

    READ MORE
  • icon

    Investing in Cryptocurrency

    06 Apr, 2022

    7 min read

    READ MORE
  • icon

    An Introduction to Trading...

    10 Nov, 2021

    7 min read

    READ MORE
  • icon

    Falguni Nayar Success...

    23 May, 2022

    5 min read

    READ MORE
  • icon

    Raamdeo Agrawal: How...

    13 Jan, 2022

    10 min read

    READ MORE
  • icon

    5 Stocks to Watch Out for...

    05 Jan, 2022

    8 min read

    READ MORE
  • icon

    Why Elon Musk Bought...

    29 May, 2022

    5 min read

    READ MORE
  • icon

    Nykaa Success Story -...

    22 Dec, 2021

    8 min read

    READ MORE
  • icon

    Taxation Rules for Bond Investors

    03 Jan, 2022

    4 min read

    READ MORE
  • icon

    Stocks to Watch: Reliance...

    29 Dec, 2021

    5 min read

    READ MORE
  • icon

    LIC IPO: Benefits for Policyholders

    18 Feb, 2022

    7 min read

    READ MORE
  • icon

    Exploring Ed-Tech Giant...

    02 Mar, 2022

    8 min read

    READ MORE
  • icon

    Capital Gains Tax

    23 Mar, 2022

    5 min read

    READ MORE
  • icon

    What are Indirect Taxes?

    15 Mar, 2022

    7 min read

    READ MORE
  • icon

    Top 10 Stocks for 2022

    29 Apr, 2022

    7 min read

    READ MORE
  • icon

    Tax on Cryptocurrency

    04 Apr, 2022

    6 min read

    READ MORE
  • icon

    Sundar Pichai: Success...

    31 Mar, 2022

    6 min read

    READ MORE
  • icon

    Ashneer Grover Biography -...

    28 Feb, 2022

    5 min read

    READ MORE
  • icon

    How to Create Your Own...

    25 Apr, 2022

    8 min read

    READ MORE
  • icon

    Shiv Khera | Every Success...

    21 Apr, 2022

    5 min read

    READ MORE
  • icon

    SEBI revises risk...

    07 Dec, 2021

    8 min read

    READ MORE
  • icon

    Long-Term Investments

    28 Jan, 2022

    7 min read

    READ MORE
  • icon

    10 Ways to Profit in a Bear Market

    30 Nov, 2021

    8 min read

    READ MORE
  • icon

    Paytm IPO

    08 Nov, 2021

    7 min read

    READ MORE
  • icon

    Understanding Different...

    09 Mar, 2022

    8 min read

    READ MORE
  • icon

    Taxation in 2022:...

    11 Apr, 2022

    7 min read

    READ MORE
  • icon

    Lenskart Startup Story:...

    29 Mar, 2022

    6 min read

    READ MORE
  • icon

    The Future Of...

    16 Feb, 2022

    8 min read

    READ MORE
  • icon

    Top 6 Types of Trading in...

    05 May, 2022

    7 min read

    READ MORE
  • icon

    What Happens to Bitcoin...

    14 Feb, 2022

    6 min read

    READ MORE
  • icon

    Environmental Impact of...

    09 Nov, 2021

    7 min read

    READ MORE
  • icon

    Crypto Ban in India?

    25 Jan, 2022

    6 min read

    READ MORE
  • icon

    How Does Bitcoin Mining Work

    21 Jan, 2022

    7 min read

    READ MORE
  • icon

    What Is Double Taxation?

    11 Jan, 2022

    7 min read

    READ MORE
  • icon

    Taxation of Permanent...

    02 Dec, 2021

    7 min read

    READ MORE
  • icon

    Top 5 eco-friendly cryptocurrencies

    21 Dec, 2021

    9 min read

    READ MORE
  • icon

    Russia vs Ukraine War:...

    10 Mar, 2022

    7 min read

    READ MORE
  • icon

    LIC IPO Details: Should...

    18 Feb, 2022

    6 min read

    READ MORE
  • icon

    LIC IPO: Expected Date, Price, DRHP

    18 Feb, 2022

    7 min read

    READ MORE
  • icon

    India’s top 10 favourite...

    22 Dec, 2021

    8 min read

    READ MORE
  • icon

    Invesco drags Zee to NCLT

    06 Dec, 2021

    8 min read

    READ MORE
  • icon

    How To Use a Moving...

    07 May, 2022

    6 min read

    READ MORE
  • icon

    Double Taxation Hangs On...

    01 Dec, 2021

    8 min read

    READ MORE
  • icon

    Deadweight Loss Of Taxation

    31 Jan, 2022

    7 min read

    READ MORE
  • icon

    Top 4 Biggest Common Crypto Scam

    21 May, 2022

    8 min read

    READ MORE
  • icon

    Top 7 Types of Investment...

    11 May, 2022

    8 min read

    READ MORE
  • icon

    The Fibonacci Retracement:...

    31 May, 2022

    5 min read

    READ MORE
  • icon

    Upcoming IPO in Nov-2021

    08 Nov, 2021

    8 min read

    READ MORE
  • icon

    Foreign Investment Funds...

    02 Feb, 2022

    6 min read

    READ MORE
  • icon

    Top 5 IPOs of 2021

    01 Feb, 2022

    6 min read

    READ MORE
  • icon

    What Are the Risks of...

    19 May, 2022

    7 min read

    READ MORE

Translate the power of knowledge into action. Open Free* Demat Account

* T&C Apply

Latest Blog

Ready To Trade? Start with

angleone_itrade_img angleone_itrade_img

Subscribe to #SmartSauda Newsletter

Open an account