Algo Trading India – Know about What is Algo Trading, Benefits & Future

 The Introductory Guide to Algo Trading India

In today’s fast-moving world, technology has become an indispensable accessory of everyday life for most people, and investors are no exception. A growing number of investors today are exploring algorithmic trading for trading financial securities.

What is Algo Trading?

Algorithmic trading, also known as Algo trading, is automated buying and selling of shares in the stock market using intricate mathematical models and defined set of commands known as algorithms to carry out financial transactions at a high-speed. The instructions are programmed in the trading software as algorithms concerning specific variables like time, price, and volume, and the computer then executes the trade as per the instructions. Automation of trades helps investors perform specific financial strategies rapidly and precisely and, most importantly, free from human error, thus increasing the probability of success resulting in higher profits.

 

Advantages of algorithmic trading:

There are distinct benefits of Algo trading India as compared to traditional trading. The various benefits of algorithmic trading include-

• Speed: Algorithmic trading India accelerates the rate of the transaction as it can analyze many parameters and technical indicators at lightning-fast speed and execute the trade.
• Greater accuracy: The human intervention in Algo trading India is minimal, thus reducing the possibility of human error. Many a time, a trader can falter in punching orders or may analyze the technical indicators incorrectly, which is not the case in Algo trading due to automation, thus increasing the level of accuracy.
• Reduction in transaction costs: Algo trading India enables traders to execute multiple orders in a short time, thus reducing the transaction cost and increasing the overall profits.
• Minimization of human emotions: Algo trading strategies in India are pre-defined and formulated, thus keeping investor emotions at bay, which is one of the most significant advantages of algorithmic trading in India. As soon as the pre-required objectives are met, the execution of trade takes place automatically. As the psychological element is eliminated from the trade, so there is no room for deviation from the strategies.
• Diversification of trades: The use of algorithms and computers Algo trading enables investors to execute multiple trades and trading strategies at one time, which is not possible in case of manual transactions. So, trading opportunities over a range of markets and securities can be scanned and executed simultaneously. Thus, Algo trading in India allows investors to take benefit of diversification, which is difficult to attain in traditional trading.

 

Disadvantages of Algo Trading 

• Faulty algorithms can result in massive losses: As this strategy is entirely based on technology, the biggest drawback of algorithmic trading India is that the wrong algorithm can result in significant losses as many transactions take place simultaneously and any fault in the algorithm can be catastrophic.

• No control by humans: As the strategy is completely automated, there is minimal scope for discretionary choice for investors. Even if the investor realizes that a particular strategy may fail, he cannot abandon the program or stop the execution.  

 

Types of Algorithmic strategies

After understanding what is algo trading, one needs to know the different types of algo trading strategies India.  Let us look at some of the most popular Algo trading strategies used by institutional and retail investors-

• Momentum/Trend Following: Trend following is one of the most popular used algorithmic trading India strategies. This strategy involves finding a trend in the price of security using different indicators to analyze the available information. The trades use technical analysis charts and patterns to execute them. Technical indicators like moving averages, oscillators and price movements form the basis of analysis, and buying and selling of securities take place automatically when pre-defined conditions are satisfied based on the technical indicators. Simplicity and relative ease of design make it one of the most widely used algo trading strategies amongst traders.

• Arbitrage Strategy: An arbitrage opportunity is created when there is a difference in the price of the security on different exchanges on which it is traded. This Algo strategy uses computers to identify arbitrage opportunities and create risk-free profits as quickly as possible and uses them for profits. If a security price is listed on more than one exchange and its price is lower on one and higher on the other, then the algorithm identifies the different pricing and buys on the exchange with lower price and sells on the exchange with a higher price.  Speed and accuracy are of paramount importance for this strategy and hence it is more efficient in comparison to manual trading.

• Statistical Arbitrage Strategy: It is a short-term trading strategy and it tries to make profits from opportunities that arise due to price inefficiencies and misquoting of price. The complex mathematical algorithms help discover the price inefficiencies swiftly and execute the trade before price correction, which is tough for investors to analyze on their own.

• Mean Reversion Strategy: Also known as a reversal strategy, it is based on the fact that the price of a security will move up or down but eventually come back to an average value at some point. The average price is calculated based on the historical data, and the strategy finds out the lower and higher price limit for stock and executes orders when they are beyond the range.

This strategy works when there is extreme movement in prices, and the unexpected swings generate profit for the investor.

 

Conclusion

Algorithmic trading has immense potential, and the benefits of this strategy are yet to be fully explored by retail investors. Brokers like IndiaNivesh provide valuable market data to traders and the right platform and tools to build on their algorithmic trading strategies.

 

Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing. 

Ref: https://www.indianivesh.in/kb-blog/algo-trading-india