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Algo Trading | November 28, 2023

Algo trading taking over manual order placing, here’s everything you need to know about it

Algo trading as the name suggests it provides algorithmic trades to function without manual or human interaction in terms of modification with respect to price, time & volume. Math such as calculus is one of the main concepts behind algorithmic trading. The evolution for development of electronic communication networks (ECNs) began, this concept of automated trading system was initially introduced by Richard Donchian in 1949, he made rules to trade of funds and securities.

Algo trading is now majorly opted by all Retail as well as institutional investors along with Investment banks, pension funds, mutual funds and hedge funds are commonly used that may need to spread the execution of a larger order or execute trades swiftly to respond to human traders. As per research In India, about 50–55% of traders use algorithmic trading.

Algorithmic trading has a 50% share of the entire Indian financial market, which includes the stock, commodity, and currency markets. These algo trades are placed via high frequency trading i. e. HFT, these include trading strategies that are heavily dependent on complex mathematical formulas and high-speed computer programmes, such as black box trading and quantitative or quantum trading also known as quant trading. Read more about the impact of quantum computing on algo trading strategies.

In this trading strategy mathematical and statistical models are used to analyse financial data to reach to investment decisions. It involves using algorithms and computer programs to identify patterns and trends in market data and execute trades based on those patterns. The algo trade is done using a huge setup or machine with high configuration hardware and sophisticated software, along with a fast internet connection.

Algo trading is considered safe as well as sound since a lot of instruction is the input for the same, if the trader has a proper understanding of the system, market, statistics, and different trading strategies along with knowledge of computer programs, he can easily place orders without needing to be present and observe the volatility and ensure the correct time to place order.

There are two widely used technical indicators in algo trading which are VWAP and TWAP. Algo trading is primarily based on The volume-weighted average price, generally abbreviated as VWAP, is a weighted average price indicator, widely used for intraday trading.

This indicator is used by both institutional traders like mutual fund managers as well as retail traders with access to algo trading infrastructure. The High-Frequency Trading or HFT strategies is built around both the volume-weighted average price (VWAP) and the time-weighted average price (TWAP) and executed for efficiency.

Below are the other importance and need of algo trading over manual order placement:

  • Creates market Liquidity: Algo-trading creates market liquidity, by processing more orders and hence making it easier to transact and trade more systematic order placement.
  • Less of Manual effort: This leads to less of manual intervention since these are system placed orders.
  • Cost effective: They are cost effective in comparative as well since it overall reduces transaction cost.
  • Flawless order placing: Due to system-based orders, these are reliable and avoids human errors with respect to missing on digits or overall manual calculations of need be along with concern for collapse of trade in case of non-availability of the investor.
  • Quick order processing: Also, algorithmic trading helps fasten the order placing process since the system is already feed with the order details.
  • Rational order placing: By eliminating the process of manual trading, it helps to remove the effect of human emotions impacting the market situations and irrational behaviour changes.
  • Strategic process: Hence it would not only be effective but also let you to stick to strategies being followed which are necessary to obtain the desired results.
  • User friendly: Algo trading is simple to understand and does not require any expertise knowledge regarding programming skills like Python.
  • Bulk order processing: Algo trading also is driving the sector since it helps to place bulk orders quickly, especially when it comes to high quantity deals where even the slightest delay in placing order would impact in lots.
  • Free will: When these orders are auto placed, the investor may focus on other strategies that are needed to be focused on.

Overall, algo trading as a trading practice can be extremely valuable. Since every trade comes with the risk you need to have a thorough understanding of market statistics as well as coding language. As a trader, you need to have experience, which will help you achieve a profitable target during algorithmic trading journey.

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