What is Algo Trading?

What is Algo Trading?

Stock trading is the most alluring finance sector, which can bring either a huge profit or loss. Once you know the knack of trading, you can take the challenges. The world of finance is complicated, and you need to stay update with technologies that is driving things ahead. One such technology that took over the stock is Algo Trading. This automated trading system allows traders to establish rules for both trade entries and exits. Today, more than 75% of stocks traded in the US market using algo trading. This no-human interference system is creating interest among traders to trade in the market for an accurate result.

What is Algo Trading?

A short term used for algorithm trading, it is also known as the black box trading. Algo trading is the process of using a computer system to follow a defined set of instruction without any human intervention. These algorithms can help place the trade request for producing benefits at speed, which is not possible for the human trader.

One of the biggest attractions of using this automated version of trading is there are no emotions left in trading since every trading conducted automatically. In this type of trading, the trading company needs software linked directly to the access broker. Top trading companies in India use Easy Language programming language and other platforms that make thing better.

Since the time SEBI allowed the use of algo method, trading companies slowly started using this automated method for trading purpose. Further, this technology is not solely the turf of institutional traders and brokers, but retail investors are also approaching to this idea. By this, it is evident that algorithmic trading is the new age of trading.

According to some industry reports, the algo trading market is expected to grow from $11.1 billion in 2019 to $18.8 billion by 2024, expanding at a compound annual growth rate (CAGR) of 11.1 per cent. India will be among the top user of algo trading method.

Establishing the Trading Rules

Traders using this system often work closely with the programmer for developing the system. This platform wizard allows a much higher degree of flexibility, helping to get a rewarding experience. Once the rules are established, the computer monitors the markets for finding buy or sell opportunities.

With fast-moving markets, traders can take this algo trading opportunity and find the difference between a small loss and catastrophic loss.

Advantages of Automated Trading-

There are multiple advantages of using algo trading traders should be aware.

Minimizing Emotions

When stock trading and emotions are blended, there is a massive chance of loss. An automated trading system can help in reducing emotions throughout the process. Since the entire trading orders are executed automatically, traders will have no hesitation to trade in the stock. Furthermore, automated trading can also curb the overtrading attitude of traders.

Backtesting-

This is a rewarding benefit of algo trading. Backtesting applies rules of understanding the historical market data for determining the viability of the idea. During the designing of the system for algo trading, there should be no room for interpretation. Traders can use these set of rules for testing on the historical data before trading. The trader must do proper backtesting to create the fine-tuning trading idea.

Improving the Order Entry Speed-

Since the system responds instantly, it can generate orders immediately. This can make a significant difference in the outcome of the trade. Once the position is entered, all other orders is automatically generated. This includes protective stop losses and profit targets. Market change quickly, and the situation can demoralize the trader to trade the profit target before the order can enter. With automated trading will help to prevent this situation.

Pros-

Helps in minimizing the emotional trading

Preserves traders discipline

Allows multiple accounts

Cons-

Technical failure may happen

Sometime system may perform poorly

Bottom Line-

There is no doubt that Algo trading is changing the entire trade scenario and is the best substitute for traditional trading method. No matter what system or method you use, having a clear knowledge of stock trading should be the primary priority.