Importance of Algo Trading

Algo Trading is the future of trading and 70% of trades on the National Stock Exchange are derived from Algo Trading.

A lot of retail traders are reluctant to learn Algo Trading and are still sticking to manual order placement and tracking and this is, unfortunately, one of the reasons why they are unsuccessful.

What is Algo Trading?

Algo Trading is short for Algorithmic Trading. It is a combination of Algo and Trading. It means an algorithm is responsible for buying and selling decisions.

In order to do Algo Trading, you need to understand different components of algorithmic trading.  

How Does Algo Trading Work?

Let’s say I have a simple strategy: I have a list of around 20 stocks that I track and all these are in an uptrend.

The strategy I have is if these stocks come down to a 20-day or 50 -day moving average, I buy them and book my profit when I get 5% or 10% of profits and I also put a stop-loss if in case any stock goes down.

To execute the above strategy in real life I have to track these 20 stocks every day and I have to check which of them are closer to moving average and also put some alerts to buy when they come to moving averages. When I get these alerts I have to place every order manually, in this case, if I am travelling, most likely I couldn’t do that and the more the stocks I track, it will become harder.

Now I can take the same strategy and I can build an algorithm for it.

Let’s understand the components now.

1.   Strategy Engine

1. This is the first component of Algo Trading.
2. This is the Software or app where we are building our logic as an algorithm as in the above example.
3. Examples of some Softwares are Amibroker, Meta Trader, Ninja Trader, Python, excel etc.

2.   Bridge

1. To execute the orders from the built-in Strategy engine to the brokers’ platform, we need a Bridge
2. Bridge connects the strategy engine and your brokers’ platform

3.   Brokers Platform

1. Different brokers have different ways of handling algorithmic trading
2. Some brokers charge for algorithmic trading and some don’t
3. For now, just understand that the broker needs to take those strategies that are coming from the Strategy engine or Bridge.

Benefits of Algo Trading?

Algorithmic Trading is not much hard and all that’s required is understanding how the strategy works and how can it be translated into a program. The amount of effort you have to put into Algorithmic Trading is very small as compared to the benefits you get from Algorithmic Trading.

• No emotions are involved in Algo Trading like fear and greed as execution is done by Algos
• All the rules you have created as Algo like position sizing, maximum loss, Profit Target etc., are applied consistently basically leading you to trading discipline.
• Trade Execution is very fast in Algo Trading as compared to manual execution, especially for those who trade in options as they move quickly.
• No need to sit in front of a computer all the time and this is a huge advantage for working professionals. 

Misconceptions about Algo Trading

• Algo trading works only in Trending Market –  It is False as we are the ones who define the strategy and that strategy may not work in a trending market. Your understanding of market context is extremely crucial for Algorithmic Trading to build algos.
• Algo Trading can only be done by people with a technical background –  It is not true and can be done by anyone and we are going to provide more tutorials for that.

So, I hope that this gave a good understanding of what is algo trading and how can you do that. In the subsequent series of articles, we will be explaining more about Algo Trading.

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