“Focus on your work while the algo does the trades for you”- Devesh Chawla, CEO, Chatur Wealth Traders, in their career, require a lot of tolerance, dedication and flexibility. For a trade to be successful, a trader needs to take into account numerous parameters while not losing one’s calm and concentration. However, this is easier said than done. Most traders get affected by either the market volatility, emotional and psychological factors or sometimes, just pressing the wrong key leading to situations where only loss is visible.
In today’s cost-conscious and competitive trading environment, these mistakes can be very costly. The advancements in trade technology have now reached a stage where they can be easily unavoidable. With rapid evolution of technological assets, the way we trade in the stock market is slowly undergoing a change too. Algorithmic trading, one of the innovative methods of trading, has revamped stock market trading. Since its’ inception by SEBI in 2008, it has been welcomed with open arms by the trading community and is now a mainstay with around 50% of the stock market trades executed through algorithms.
What is Algo trading?
Algo-trading, also known as black-box trading, is an approach to executing trades using a system to follow pre-programmed instructions, which decides on the execution of trades or orders after deciding on aspects of timing, price, or quantity of the order without any human intervention.
A set of instructions are programmed into the trading software to form algorithms, with references to variables like time, price and volume. The computer makes the trade by reading the instructions on the algorithm. The rules are built in a way to cause very less impact on the stock price at the time of order execution.
When a trader uses algo-trading, while it removes the need for constant monitoring and hovering around the screen, it also has its own drawbacks. Let’s take a quick look at all the pros and cons for a trader using algorithmic trading.
Why Should You Consider Algo Trading?
- Automatic Trading. No manual interventions are needed.
- Allows executions of large volumes and parallel processes to be traded simultaneously.
- Traders can make incorrect analyses, but algorithms run with perfect accuracy.
- Faster and more precise reaction response to market movements
- Pre-formulated strategies with no room to get affected by their emotions.
- Ability to apply trading rules to historical market data to determine trading strategy viability.
- Allows traders to use multiple strategies and accounts at once to spread the risk across various asset classes, strategies and investment instruments.
- Does not require constant monitoring yet it is being constantly monitored via the algorithm
Who should consider Algo trading?
If you are a trader investing in medium or long-term securities, then you can easily manage your trades in large quantities with the help of an algorithm. If you are a day trader or trade frequently, algo trading can benefit you by freeing up your time and energy as the system works on its own. If you want to have more control over your trading process, then this method is for you as it does not allow room for human emotions to interfere in the decision-making process. If you are a systematic trader who follows pre-determined trading rules, then this method is definitely for you. Algorithmic trading is best suited for day traders or short-term investors as they need to take into account various factors like price, timing and quantity which might lead to human errors. Cons: Algo-trading is as good as the system used to execute the orders. Algo-trading requires a trader to review, filter and select a strategy to use. While looking good on paper & during back-testing, the strategies may file in the live market. Technical glitches can sometimes lead to uncalled-for losses.
Experience the Algo benefits yourself
The market is constantly moving, and a human trader cannot hope to match the pace. Algorithmic trading will make sure that your trades are executed at the best possible price, with the least slippage and maximum profit. There are many available software platforms which offer different features. While it may be a bit overwhelming for a new trader to understand and implement these strategies, the experts at Chatur Wealth can help you get started and guide you to sustained success in the markets.