In India, algorithmic trading is a relatively a new notion. Simply defined, this sort of trading involves placing a trade using software or a computer programme that follows an algorithm. An algorithm is a pre-defined collection of instructions that are already present in algorithmic trading software.
Let us use an example to further simplify the notion of algorithmic trading. Assume the trading software has given two commands:
Buy 50 shares of a stock option when the 50-day moving average reaches the 200-day mark, and sell the shares when the 50-day moving average falls below the 200-day mark.
The software then automatically starts monitoring the stock’s price. When the specified requirements are met, it purchases the shares and sells them. This eliminates the need for the trader to observe live stock prices and place manual orders. After properly recognising a trading opportunity, the algorithmic trading system automatically does the same for the trader. To carry out the specified instructions, however, an algorithmic trading platform is required.
Characteristics of ALGO Trading:
The rapid rise in the popularity of algorithmic trading is indicative of its profitability. There are other advantages to this as well, including:
1) Being able to obtain the greatest possible price for the transaction,
2) Increasing the odds of success by placing orders quickly and accurately,
3) Traders can avoid big price swings by timing their trades precisely and instantly,
4) Transaction costs are greatly minimised,
5) Multiple markets can be automatically checked for trade conditions at the same time.
6) Significant reduction of common errors that arise while arranging manual transactions
7) The inclusion of a backtesting function allows traders to assess the effectiveness of a strategy by testing its outcome using real-time and previous data before implementing it.
8) Emotional and psychological effects, as well as the errors that emerge from them, are fully eradicated.
9) As a result, high-frequency trading attempts to secure profitability by employing pre-programmed instructions to:
10) Place a huge number of orders in a short amount of time across various markets using multiple decision parameters.
– Buy-side firms or mid-to-long-term traders, such as those working in pension funds, insurance, and mutual funds, employ custom-built algorithmic trading software to buy stocks in massive quantities while remaining discrete. This allows them to finish the task without affecting stock prices.
– Financial institutions or brokerage houses, arbitrageurs, speculators, and other sell-side participants are often short-term traders. They greatly profit from algo-automated trading’s trade execution option. Algo-trading aids assist in the creation of market liquidity, making it beneficial for sellers.
– Hedge funds and pair traders are examples of systematic traders who are trend followers. They use an algorithmic trading platform to provide the necessary trading rules and then leave the software to trade on its own.
Algorithmic trading is a fascinating phenomenon. The more one learns about it, the better one knows its advantages. Active trading is significantly more realistic when employing a systematic technique than intuitive or instinctual forecasts.
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