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What is Algo Trading?

Due to the advent of digital technology and rapid electronic development, the share trading domain has experienced transformative changes over time. Today, there are multiple trading modes and numerous trading options for all types of investors. One of the most popular trading modes that have emerged over the last few years is algo trading, also known as algorithm trading.

 

Published on 11 January 2022

In algo trading , there is minimal or no human intervention, and trades are executed through defined computer programmes that assess market data on specific parameters. Algo trading mode involves the lowest brokerage fees.

Here is a quick guide to help you understand algo trading:

What is Algo Trading?

Also known as algorithm trading, black-box trading or automated trading, algo trading executes trades through a computer programme with pre-defined trading instructions. These instructions are also known as algorithms. Algo trading can likely generate profits at a much higher speed and frequency than a human trader. Algorithms in algo trading are based on timing, price, volume, etc., of the trade.

Algo trading enhances and automates the trading process. It also reduces human bias and the emotional aspect of trading activities. However, complete automation is not available for retail investors, and there is some human involvement in placing trade orders.

Different trading platforms levy different discount brokerages for algo trading . However, as compared to other investing modes, algo trading offers the lowest Indian discount brokerage.

How does Algo Trading Works?

Algo trading works on pre-fed computer programmes that function at a high frequency of placement and execution. These computer programmes contain specific instruction sets, which form the root model of trading. These instructions can relate to the price, quantity, time or any other mathematical model.

For instance, an algo trade model could have a trade criterion that specifies buy 60 shares of Company X when its 50-day moving average is above the 100-day moving average (average of day-to-day price fluctuations). Alternatively, another algo trade criterion could be to sell shares of Company X when its 50-day moving average is below the 100-day moving average.

Based on the pre-fed trade criterion, the computer program monitors the stock price and buys or sells the shares only when the defined conditions are met. In this case, you do not have to continuously monitor the stock prices or manually place orders. The algo trading platform places the trade on the terminal and forwards it to the exchange, which reduces human intervention and simultaneously offers discount broker fees.

What are the Benefits of Algo Trading?

  • Share trades are potentially executed at the best possible prices.
  • Trade placement and execution is immediate and accurate, avoiding dramatic price fluctuations.
  • Low transaction cost due to minimal human intervention. Algo trading comes with cheap brokerage rates because it functions primarily on computer programmes.
  • Automated and detailed checks on market conditions and price trends.
  • Low risk of errors as there is minimal human involvement.
  • Low emotional and psychological bias in trading.

Who Should Use Algo Trading

  • If you are investing for the medium or long-term, you can use algo trading to trade in large quantities without influencing the stock prices due to the trade volume.
  • If you are a short-term investor, you can use algo trading to generate quick and high profits, eliminate losses and create sufficient liquidity.
  • If you are a systematic trader who aims to follow market trends, you can use algo trading and choose a reliable Indian discount broker.
  • If you want to execute large trade volumes at the lowest brokerage commissions, you can opt for algo trading.
  • If you want to trade in multiple exchanges – NSE, BSE - through a single algorithm and pay cheap brokerage.

Overall, algo trading is a successful trading mode with the potential to dominate the share market in future. If you are interested in algo trading, choose a reliable platform that offers advanced algorithm trading functionalities and discount broker fees. Whether you are a new investor or an experienced one, algo trading can prove fruitful if followed diligently. The best part is that it comes at minimal Indian discount brokerage.

Chandresh Khona
Team Espresso

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