Over the years, Algo trading has gained in terms of market share on Dalal Street. With the advancement in technology and readily available trading platforms, Algo trading has become extremely popular among trader community.
In developed countries, 70% of the volumes are generated through algo trading. Indian traders are also catching up with this evolving technology; rather it has become a compulsion for them to shift to such avenues to compete with the machine trading.
Algorithmic trading is a method of executing orders using automated pre-programmed trading instructions accounting for variables such as time, price, and volume. This type of trading was developed to make use of the speed and data processing advantages that computers have over human traders. the main reasons behind such huge market shares worldwide are the benefits it holds over traditional manual trading.
Since Algos are executed on a pre defined set of conditions, it is impossible to match that execution speed manually. With the help of Algo a trader can scan and execute multiple indicators on multiple stocks at the same time, this is something no human can do manually.
Second major benefit is Accuracy, manual trading can’t avoid human errors such as wrong orders, and quantity or price wrongly entered etc, but with Algos since trades are generated automatically through computers the information entered is accurate as per the given conditions.
A trader loses most of the money because of Human emotions, emotions are something that you can’t take away from a human, and every human is susceptible to greed and fear, and thus taking irrational decisions. But as trading decisions are restricted to conditions that are already set and there is no human intervention, thus one overcomes this behavior bias and avoids loses.
Other benefits are back testing and reduced transaction costs, if you have a predefined set of criteria properly defined set of rules for entries and exits, one can backtest his strategy on the historical data, back testing helps you improve your result by modifying/eliminating if any flaws are present.
Manual traders need to supervise and monitor markets throughout the day, but Algos doesn’t require constant supervision. The dramatic time reduction for trading lowers transaction costs because of the saved opportunity cost of constantly monitoring the markets.
Name: Harshit Singhal
Qualification: CFA(US), MSc Finance and Investment ( UK) , BBE.
SS API Bridge: https://www.sscorporate.com/next-gen-trading-api/