Algo-trading, or automated trading, is like black-box trading, which involves placing a deal with a computer program that follows a set of instructions that are set by the programmer or the manager of the portfolio. Technology, such as artificial intelligence (AI) and machine learning, helps traders use big data and make calculations for real-life trades.
Online trading accounts have changed the way people trade and closed many of the gaps that used to make investors and traders afraid of trading. The paper financial certificate system faced issues like the loss of certificates or forgery of the physical certificates, which resulted in financial losses to individuals, stock companies, and even the stock exchange.
A more reliable online trading account was introduced to make the trading flow better. For retail investors, online trading has removed the barrier. Now, people above 18 years of age who have a PAN card can simply open their Demat account and trading account and start trading in the stock market.
The timing, price, and quantity or any mathematical model is used to define the set of instructions embedded in the terminal used for algorithmic trading. In this article, you’ll learn how algorithmic trading works? Apart from this, we will also discuss the profit that can be made through algo-trading and how this can be a systematic and liquidated trade.
Table of Contents
What Is Algo-Trading?
An algorithm in computer language refers to the series of instructions required to complete a task or a process. It is difficult for a human to handle large volumes of trade, and the risk of making bad trades, resulting in large losses, is quite high. Therefore, an algo-trading system has become necessary to handle these types of trades. An automated trade helps investors reduce transaction costs and control their trade by planning each stock price movement. The automation process is expected to be one of the most complex strategies that requires mathematical and historical data from multiple years in the stock market.
With machine learning and AI, you can accelerate your trading across multiple segments and use this technology to build better predictive models that can identify trends and perform the necessary steps to save your investments and earn better returns.
Is Algo-Trading Safe?
Strategies and methods of trading are different for each trader. Every trader has a different point of view. But when it comes to handling large numbers of securities in large volumes, this is quite hectic and prone to errors. For this reason, adopting an algo-trading software is done on a powerful computer, and algorithms are utilised to perform and monitor the strategy set by the technical trader. But there are different opinions about whether algo-trading is safe or not.
The common fact is that every investment is risky, and so is algo-trading. Before making an investment decision, it’s better to consult with a financial professional who can guide you through your investment and your financial goals. As there are many algorithmic trading strategies, it’s better to hire a professional trader who charges you a small fee but can help you build your financial portfolio through algorithmic trading.
Algorithmic trading requires enormous amounts of trades to generate profits, and the frequency of this trade is also high with different types of securities.
Algorithmic trading was introduced in 2008, and its demand is currently high. The ratio of algo-trading is about 50% to 70% in India. This number is projected to rise in the upcoming years.
How Algo-Trading Works
To understand algorithmic trading and how it works, you first need to understand what a computer program is. It is specialised computer software that follows instructions to execute a trade in the same way that you would give instructions to perform a specific task, such as sorting a range in your Excel sheet.
Technical traders often test their trading models to avoid any errors in real-world trading. To test the trading terminal, you need to check the accuracy of a predictive model.
Out-of-sample testing entails collecting a small amount of data and then training the model to predict the outcome based on the previously collected data. Backtesting uses historical market data, which will test models quickly and smoothly to provide feedback about the performance of securities. This out-of-sample testing is important in order to test the sample data and predict further data. If this test fails, the model is discarded, and you must make changes. And remember, if you keep testing on the same model, then the chances are higher that you will get a suitable model in a test but a failure in real-world trading.
A stock market is a volatile place. No proof says that a mathematical principle is accurate in technical trading. There are different characteristics and situations where other algo models can apply, and it may or may not yield a profit.
Algorithmic trading is not a quick or direct answer for trading with profit. It requires years of experience, technology, and expertise to set up a proper field to trade in the financial market. Exploring different strategies can increase your chance of making a profit.
Building Algo-Trading System
To understand the algo-trading system, we can take the following example.
Suppose a trader buys a stock with a 50-day moving average that crosses above its 200-day moving average. This trader then sells a stock when the condition says that the stock’s 50-day moving average falls below the 200-day MA. The trader will enter or exit the trading platform according to the desired price.
Now, the computer will automatically update the stock price and the MA. The computer will enter and exit the trading platform according to the conditions.
Thus, by applying the algo-trading system, traders no longer need to manually check the live prices and graphs. The trading system will automatically handle all the tasks and accurately detect the trade opportunity.
Conclusion
As a smart investor, it’s better to move with new-age technology rather than be the last person in line. Investors and traders always look for opportunities to turn their savings into returns. Trade is all about risk and rewards. It’s better to consult a professional such as Share India. You can get expertise and investments as per your financial goals. Before making any investment, you should understand the stock market inside and out.
