With the advancements in technology and financial market trading application, algorithmic trading or algo trading has received acceptance across the globe. Just within a decade, algo trading is one of the most popular and common ways of trading in the developed economies of the world. Now, algo trading has started to find its hold in developing economies like India too. Therefore, it becomes important to learn details about it.
What is Algorithmic Trading?
Algorithmic trading is a way of executing orders in the stock market using pre-defined trading instructions. In this type of trading, computer programs are developed using a defined set of instructions for placing trade orders and generating profits at a higher speed. Algo trading carries out the transaction at such a frequency that is almost impossible for a human trader.
You can even create your algorithm and deploy it for generating buy or sell signals. Retail traders or beginners can generate the buy or sell signals based on their own programs and earn consistent returns from the stock market.
Benefits of Algorithm Trading?
Some of the benefits of Algorithm Trading are as follows;
- Trades are carried out at lightning-fast speed at pre-defined levels.
- Trades are done at the best prices.
- Trade timing is accurate that avoids significant price changes.
- Since the trades are automated, there are no chances of manual errors while placing orders.
- To check if any algo program is successful or not, backtesting can be done based on historical and real-time data.
- No chances of mistakes done by humans due to emotional or psychological factors.
- Transaction cost is low.
How Beginners Can Use Algo Trading For Making Profit?
- The first step for a beginner in algo trading is to learn its programming. By programming and back-testing the strategies, you will know whether the strategy can be profitable or not. Now with the help of high frequency trading mechanism, trades would be implemented in milliseconds.
- Algo trading protects beginners from the basic mistake they make by taking emotional decisions. Algo trading is emotionless. It does not matter whether a trader is making a profit or loss, the algorithm will keep on trading as per the defined program.
- Algo trading makes the challenge of dealing with a large number of lots easier for the beginner. The algo mechanism can handle a large number of trades at ease providing the beginner an opportunity to scale up the number of trades.
- There is no need for the beginner to sit in front of the screen to take any position and close the trade. The machine will carry out all the trades for you. On days when you do not have the time of sitting in front of the computer screen, you can leave the task of algo trading on the machine.
In today’s time, almost 60% to 70% of the trades in the stock market are carried out using algorithms. It is expected that in coming years it will reach up to 90%. It is a strong indicator that algo traders are getting profitable results and hence the volumes are on the rise. Experts believe that since algo trading is based on artificial intelligence, traders can generate higher profits from it. It also eliminates emotions like greed and fear making algo trading a much more stable form of trading as there is no human intervention.