As investors or traders, we often find ourselves in scenarios where we capitulate and discard the planned strategy, letting our emotions get the better of us. If you are someone who has not yet stepped foot in the markets, no matter how focused you are, you will surrender to your emotions at least once during your adventure in the markets. As humans, our fears of losses and greed for excessive wealth will influence some buying and selling decisions that impact us negatively in the long run. Failing to adhere to the predetermined 5% stop loss and exiting the trade at a 30% loss is a simple example.
The solution to the above problem of conceding to our emotions in the markets was fabricated in the form of algorithmic trading. This article will help you understand what algorithmic trading is and also tell you how you can learn algorithmic trading as a beginner in India.
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What You Should Know about Algo-Trading
Algorithmic trading is the process of executing trades with the help of algorithms. In simple words, algorithmic trading or algo-trading uses computer software that can execute trades in accordance with your instructions. However, do not mistake it for a press-and-push button that will trade for you automatically. It is not automated in that sense. You have to identify the best entry and exit points, whether you are trading normally or with the help of algorithms. The only difference is that, in the latter’s case, there will be no second thoughts or guesses before making a decision. The algorithm will perform the trade exactly like it was programmed to do.
From the previous paragraph, it is quite evident that if you wish to learn algorithmic trading, you need to know computer programming. The hard work in the case of algo-trading is designing an algorithm that can help you achieve your investment goals. Institutional firms and fund houses hire engineers and mathematicians to develop algorithms of the highest order.
How to Learn Algo-Trading in India
So, how can you learn algo-trading in India as an individual trader? To get started with algo-trading, you first need to develop an understanding of how algorithms are written. For that, you must have knowledge about computer programming, coding, and software development. If you have a science, technology, engineering, and mathematics (STEM) or computer science background, you likely know at least one computer language. Otherwise, consider taking a professional class to learn computer programming and a computer language like C++ or Python.
That said, you are essentially still dealing with asset prices, which is why you still must be well-versed in financial markets. You should understand price action, assess market conditions, and backtest your strategy. Backtesting is the process of testing the efficiency of your trading strategy by applying it to historical price data.
Difference Between Algorithmic Trading, Quantitative Trading, and Automated Trading
Now that you have got a gist of what algo-trading is, is it the same thing as quantitative trading and automated trading? Not exactly, since there are nuances that separate the three trading styles from each other.
1. Algorithmic Trading
To perform algo-trading, the trader or programmer converts a trading strategy into an algorithm or an algorithmic trading strategy. You can backtest the algo strategy with available historical data to find its success rate in the markets.
2. Quantitative Trading
The second type of trading, quantitative trading, is performed by using advanced mathematical and statistical models. The trading strategy is derived using complex mathematical and statistical formulas. These mathematical and statistical formulas can be used to derive an algorithm.
3. Automated Trading
Automated trading is a subset of algorithmic trading wherein the entire process from start to finish—order generation, submission, and execution—is automated.
How to Become an Algorithmic Trading Professional
So, is it possible to make a career in algo-trading in India? Yes, it surely is, as you can become a self-employed algo-trader or work for a firm that relies on algo-trading to make investments in the stock market.
Comprehensively Understand the Core Algo-Trading Requirements
As discussed in one of the above sections, to be able to perform algo-trading, you must have knowledge about computer programming and financial markets. The former helps with writing the algorithm, and the latter helps with understanding market cycles. Besides those, you must also have quantitative analysis skills. Quantitative skills come from working with statistics and time-series analysis. It is a useful model for analysing historical data and developing algo-trading strategies.
Consider Opting for an Algo-Trading Program
Now that you know what the basic requirements are to learn algorithmic trading, what can you do to pursue it as a profession? To make a career as an algo-trader, consider opting for algo-trading courses offered by institutes. Popular algo-trading institutes include the BSE Institute, the CFA Institute, WorldQuant University, and QuantInsti. You can also consider reading books on how to learn algorithmic trading for beginners. At the same time, there are free resources like those you can find on the Internet to learn algo-trading. For example, you could read blogs and listen to podcasts that cover algo-trading for beginners in an easy-to-understand language.
Find a Job at a Firm Practising Algo-Trading
Once you develop algo-trading skills and are competent enough, you seek a job at an investing or trading firm to practise algo trading. As an algo-trading professional at the firm, your job will demand that you implement your knowledge and develop trading strategies and quantitative models.
Misconceptions about Algo-Trading
Now that you’ve read an in-depth section on how to learn algorithmic trading in India, let’s take a look at some of the common misconceptions about algorithmic trading.
- Firstly, many hold the false assumption that algo-trading can only be performed in a trending market. In other words, you do not need a bullish or bearish market to trade using algorithms.
- Another popular misbelief is that to become an algo-trader you need to have a technical background. Sure, if you have studied computer programming in school or college, it will be helpful. However, even if you have not formally studied programming, you can easily learn a computer language like Python with a little dedication.
Check out the algo-trading benefits and how it can help you trade more efficiently and profitably.
Conclusion
So, as a beginner, this is what you must know about algo-trading. However, if you are completely new to the markets, do not focus on learning algorithmic trading right away. First, get a hang of the market by studying it properly and understanding the factors that affect it. However, at the same time, you can feel free to learn a computer program but do not be concerned about developing the algorithm right away.
