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What you should know about algorithmic trading
Publish Date: June 10, 2019
By: Sandhya Kannan, Head – Content
Over the years, technology has changed how people trade in the Indian stock market. When algorithmic (algo) trading arrived in 1990, it transformed the share market experience.
Related: How to buy your first stock
What is algo trading?
Algo trading involves an automated system that uses algorithms and computer codes to execute trades.
The trader has to define variables like price, quantity, and time. Once the market meets these pre-set conditions, the programme executes the trade.
The algorithms can tell a trader when to buy or sell as well as the number of shares to trade.
Related: How to deal with a market crash
Benefits of algo trading
1. Trading takes place speedily and at the optimal time based on share market conditions. This increases the chance of high returns and decreases the possibility of missed opportunities.
2. The trade is based on pre-set conditions. This removes the likelihood of irrational trading decisions based on human emotions or error.
3. It reduces the time spent on analysis.
4. The trader is in full control of the trades. He/she decides on the price, volume, and time of the trade. The computer merely executes the trades.
Related: How much money do you need to start stock trading?
Algo trading strategies
1. Trend analysis: The stock’s movement is predicted after analysing its current and past behaviour. Traders can enter their requirements based on the available data.
2. Arbitrage strategy: This is based on the profits made due to price differences between the two exchanges in the Indian stock market. The algorithm identifies these differences and executes the trade in real-time. It is quite useful in volume trading.
3. Trading range strategy: This strategy assumes that after a rise or fall, the price will return to its average price. The algorithm identifies the average price range of a stock. It sells as soon as the price of the stock leaves this range.
Related: Beware of these common Indian stock market scams
Conclusion
Algo trading is a boon for traders as it speeds up trades in a fluctuating share market. Thus, the trader does not have to spend hours monitoring the market and placing orders manually.
Interested in algo trading? Open a trading account to see how it works.
Also read:
- Disciplined investment and wealth creation
- How to read the trend in stock market indices
- All you need to know about stock quotes
- Tools and platforms to simplify your trading experience
- Einstein’s theory of relativity and money
