Algorithmic Trading (Algo-Trading) – I am sure, many traders and investors reading this article would have heard this word a few times in the recent past. It is arguably one of the trending topics for Indian retail traders.
There are many definitions of it on the internet as well. In this article, we will learn in detail what exactly is this algo trading and whether it will be of any benefit to retail traders/investors.
Algo trading as the name suggests is the execution of trades via algorithms (Strategies coded on specific languages like Python, C++, AFL, Pine, etc). These algorithms constantly monitor the stocks/indices of your choice and generate and execute orders on your behalf, giving you freedom of time and making you free from sitting in front of screen and monitoring charts.
When we talk about algorithms or words like Python, C++, this directly creates a complicated image and it seems extremely difficult to understand and use, and hence many retail traders don’t even take up the first step to dive into this field.
Let’s make things clear and simple:
Firstly, algo trading is not rocket science, and yes a non-coder with zero programming knowledge can also operate heavy and complicated algos at his/her fingertips. After all, they are just ready-made commands that need to be deployed using a few clicks.
Many people confuse algo trading with machine learning and artificial intelligence but I want to clarify that both are completely different.
In algo trading, as a trader, you give the command (via algo) on how to enter and exit any trade, so it's your logic that is getting automated. Algo trading does not mean algo will automatically decide when and what to buy, that stuff is AI.
So, if your trading strategy is profitable, your algo trading will also be profitable, and if your trading strategy is loss-making, no matter what technology you use, it will never yield profit.
If you don’t have any trading strategy, don’t worry, in this series of articles, we will cover how to create some good trading strategy from scratch without even involving any coding part.
Now the next question that a user may have is: If I have to create a trading strategy and feed it to a machine, why should I do algo trading? I can stick to manual trading.
The answer to this question is quite simple - algo trading helps you with discipline, speed, and precision in order placement.
Many times we miss entries and exit on time because of several reasons like not being in front of the screen or not being in front of the right chart at the right time, or we are travelling and there is no network, the reasons are endless. When we shift to algo trading, we never have to worry about missing any trading opportunities, as algorithms will precisely place entry and exit orders in milliseconds.
Second, the advantage of switching to algo trading is the elimination of emotion and biases. Many times we fail to book profits or losses on time in spite of being in front of the screen purely because of hope and greed, and the majority of the time, it goes against us.
By shifting to algo trading we can define strict targets, stop loss, and trailing SL criteria to ensure the risk-reward ratios are maintained and our trading becomes more disciplined.
The third advantage is the power of backtesting and optimisation; there are two amazing techniques that can reduce our learning curve and help us find the right strategies in just a few minutes, we will talk about this in detail in our next lesson.
To Summarize:
Algo trading is just assistance to us, that helps us automate our strategy and make us free from sitting and monitoring the screen; it can’t take trading decisions on its own, and we have to feed the entry and exit criteria. This makes us more disciplined and helps us trade complicated setups very easily.
Also, a non-coder can be an algo trader using no-code platforms. We will discuss everything in detail in our next article.
(The author is Co-founder Algofox.com)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
