What is Algo Trading?

Though most of the Indian traders are used to doing trading manually, sitting in front of the screen for hours, taking trading decisions based on their own discretion, thumb rules and gut feeling. However, a new way of doing trading is fast emerging, called algo trading.

In fact, in most of the western countries such as USA, algo trading is much more widely used. As per an estimate, 90% of the trading in USA is algo trading, only 10% is discretion-based trading. This trend is fast catching up in India too.

Though some Indian retail investors have been doing algo trading for over a decade, this trend has really started growing only since last 3-4 years. In this article, we will throw some light on this new trend.

Note

Algo trading is also known as Algorithmic trading, Systematic Trading, or Quantitative trading.

Table of Contents

• What is Algorithmic trading?
• Advantages of Algorithmic trading
• Some tips regarding Algo Trading

What is Algorithmic trading?

Algorithmic trading is a kind of trading wherein we enter the rules of trading into the computer and let it trade in live market based on those rules. So, basically the computer trades on our behalf.

The rules are programmed using some programming language, e.g. Pine Script in Tradingview. Nowadays, there are also some graphical interface software available to traders, wherein they need not code, such as Streak by Zerodha, Tradetron, etc.

So, algo trading removes the human factor in trading. Your trade will be as good as your logic and coding.

Note

Nowadays, there are many readymade algo software and algo scripts available in the market. You may buy them and start trading. However, this may be very risky to say the least.

Never use a algo/script that you do not understand. Only use those algos/scripts that are open source or that you can read and understand – see what that code is doing, learn its pitfalls, risks involved, do backtesting, and only then think about using that in live market.

To learn more about backtesting, you may read this article of ours.

Advantages of Algorithmic trading

• As Algorithmic trading is rule based trading and done by computers, no emotions are involved. Computer does not get scared or greedy. So, by doing algo trading you ensure logic based, emotionless trading.
• It opens up a lot of time for you. You need not sit continuously in front of the screen.

Some tips regarding Algo Trading

• Though algo trading allows us to move away from the screen, there are a few trades where we should be vigilant and monitor the live trade. For example, if you are selling options make sure you are monitoring the live trade. Even if you have placed a stop loss, sometimes stock exchange removes the stop loss placed by option sellers. Many traders have incurred huge losses because of this in the past. Only you can detect such glitches, not your algo script.
• Ideally, you must diversify even in algo strategies. You should concurrently use 4-5 strategies. If these strategies complement each other, you will get even better results - say profits in one strategy cover the losses in the other. If you have a set of strategies that cancel out each other’s losses when the market is moving agianst you, but augment the profits when the market is moving in your favour, you have attained nirvana! Let the computer make money for you - you may live your life!

Winding Up

Algo trading is still picking up in India. Though it’s available for big institutional investors since long, Indian retail investors are just starting to get its taste. Most of the leading brokers in India are still in the process of providing this facility to retail traders.

As of now, there are many third-party websites available in the market that work as a bridge between leading broker apps (e.g. Zerodha, Upstox, etc.) and algo platforms (such as Tradingview, Amibroker, etc.). For example, algomojo, nextlevelbot, etc. However, this is a very fast-changing market, new players are evolving, brokers are coming with new functionalities on their platform, SEBI is coming up with new regulations regarding algo trading and these third-party apps/websites. So, be alert and attentive.

For example, algo trading in Zerodha is semi-automatic. Even if you use Streak, the algos will only give you buy and sell alerts on Zerodha app. Your trade will not get executed automatically. You still have to manually click on “OK” button in Zerodha app for executing the trade. Though there’s a workaround for this - to automate this you can install a google chrome extension that will automatically click “OK” for you (given that the screen is not in sleep mode). Though Zerodha allows us to view Tradingview charts, we cannot yet execute algos made there on Zerodha.

Successful people do not do different things, they do things differently. Maybe algo trading is that different way of trading. Do test it out. Start small, and see if it works out for you.