Algorithmic Trading

by Alpha Bot An automated trading system

Technology has changed the way of our work. The financial markets are also not untouched by technology. At present, 30-50% of traders in India are using Algorithmic Trading, and 75% of traders globally. As we all know, Trading is the buying or selling of securities in financial markets. Algorithmic Trading has introduced mathematical algorithms into Trading and make Trading technological. Algo Trading involves building and implementing trading strategies.

What is Algorithmic Trading?

Algorithmic Trading is the most advanced form of Trading and highly technology-driven. It is the process of converting a trading strategy into an algorithm using computer codes. Computers execute the trade based on these algorithms. It has the advantage of speed and data processing over human traders. The other term used for algorithmic Trading is Algo Trading.

Algo Trading works on the pre-programmed automated instructions (an algorithm) for Trading. It is a computer program - step-by-step instructions to complete a trading task to achieve a particular outcome like increasing profitability, better execution, etc.

Who can take advantage of Algo trading? Experienced and professional traders, people who want to automate their trading strategies, Technical analysts who wish to automate their Trading, Jobbers who want auto-execution of trades, Wealth managers on behalf of their clients.

Automated Trading and algorithmic Trading are used interchangeably mostly. But these two are different terms. Algo Trading is the process of converting a trading strategy into a computer-based algorithm to execute the trade. The strategy can be implemented in an automated mode. While Automated Trading is the complete automation of the trading process.

The Automated Trading algorithms are based on the markets and the objectives of the trader. It facilitates quick profits in Trading in such a frequency that it is impossible for a human being. The price quote changes multiple times within a second. With the help of the algorithmic Trading, trades take place within the fractions of the seconds without human intervention.

How Does It Work?

It is a challenge to transform the trading strategy into an algorithm using a computer program to execute Trading. Highly skilled quantitative experts, researchers, and developers with a tech-focused approach are required to develop algorithmic trading software and make it more approachable. It must be easy to use. It is the final component of algorithmic Trading.

The primary technical necessities for algorithmic Trading are:

1. Computer-programming familiarity or Ready-To-Use trading software to do your Trading:

Setting up an algorithm requires some technical knowledge. You can buy algorithmic trading software or build it. You may have the technical ability to program the trading strategy, or you can hire programmers, or use Ready-to-use trading software. Take good care while choosing software for algo trading. You can suffer hefty losses in financial markets with faulty software.

2. Access to trading platforms and network connectivity with good strength:

You should have access to prominent trading platforms and reliable network connectivity to execute trades. Trading platforms should be famous, which provides live streaming quotes, research calls, integrated fund transfer systems, etc.

3. Access to market data feeds:

The algorithm monitors the market data feeds in search of opportunities to execute trades. Market data feeds allow traders to know the latest price for financial instruments.

4. Infrastructure to backtest the algorithmic system:

You have built the algorithm as per your trading strategy. Now you need to backtest it before making it live on real markets. You should have the infrastructure and ability to check the efficiency of the system.

5. Historical data for backtesting:

The availability of historical data depends on the intricacy of the algorithm, i.e. the rules and instructions implemented in the program.

Algo trading involves the formation of predefined algorithms (set of instruction) based on Algo Trading strategies so that the computers can execute the trade on its own, based on strategy. These smart algorithms are a bundle of backtested trading strategies. Backtested strategies are tested and evaluated on historical data. It helps to maximise profits.

The Core

The algorithms are designed that can be compatible with the strategy chosen by the trader. The traders can choose different strategy at a different point in time depending upon the market conditions and other factors.

Strategies are essential in determining the efficiency and profits that can be obtained from algo trading. Although the algorithm is placing the orders, it is the trader who develops the strategies to define how the Trading will occur. The traders decide what they want the computer to do, at what volume, at what price, at what time.

Let the machine evaluate the trading opportunities for you and suggest a trading decision with maximum profits.