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Algo Trading | August 25, 2020

Effective ways of trade execution with Algo Platforms

In this age of advanced technology, the trading world has seen a tremendous growth in terms of digitalization. One of the modern-day system famous in the trading world is automated trading system. The automated trading system simply allows the traders to program specific rules for entries and exits to execute automatically via computers. This has been rising in India, covering over 50% of the total trades.

While talking about the automated trading, the two well-known methods in India are colo based algo trading and API application-based trading. While colo based algo trading is practiced for a considerable time in the ecosystem, API application is relatively new to the trading world. Let’s understand each of the methods and analyze the best of them both to automate your trades.

Algo Trading

What is Co-location based Algo trading?

The process of using algorithms to produce, buy and sell signals based on set parameters such as price movements or volatility levels. The defined criteria to execute the trades are back tested over a time so that the current market conditions can match the same. The primary reason behind the advancement of algo trading over the years is the time saved by the trader scanning the markets.

While building algorithms, there are usually three key strategies available to the traders. First, price action strategy- in this algo will produce buy or sell orders with stop losses as per the defined price action logic like breakout of previous open, close, high or low points on a candlestick. Second- technical analysis strategy - the algos release orders based on the existing indicators like Bollinger Bands, MACD or your own created indicators. Third one deals with the combination of the previous two, price action and technical analysis.

In the case of algo trading in India, you can execute your back-tested strategies on the broker’s terminal directly with no hassles. Apart from some pre-loaded strategy on the terminal, you can also integrate the charting tools on the interface of the platform and generate automated signals. It is important to understand that your trading strategy plays a vital role in the trade success. The broker’s algo trading platform is capable enough to transfer any strategy you have planned on Amibroker or even excel for the purpose of direct execution. 

Advantages of Algo Trading

1. Due to direct placement of your order on the broker’s terminal, the execution speed is extremely high often in milliseconds or even microseconds.

2. These trades are low maintenance with your set-up running throughout the day.

3. Brokers also provide some pre-loaded and pre-approved trading strategy for the use of traders. (Example: Option Multi Leg Strategies)

4. Access to advanced technology to combat trading and reduce false signals, one of the major reasons behind losses.

5. Option to add as many advanced trading strategies with no extra costs to leverage more trading.

6. The trader doesn’t have to be an expert in coding or programming.


Disadvantages of Algo Trading

  1. High costs associated with expensive algorithm software, which eat into the realistic profit potential from your algorithmic trading venture.
  1. The trading strategy is applied directly on the broker’s terminal which might lead to distortion or even disclosure of your trading style.
  2. There can be some cases of system failures which may lead to hefty losses in the financial markets.


API based Automated Trading

What is API based Automated Trading?

This is the process of automating your trading by connecting your front-end solution to the broker’s execution terminal technology. API or application programming interface-based trading does not comprise their own platform like with colo based algorithm trading. They are the data solutions that give access to the broker’s terminal, which enables you to retrieve historical data, real-time prices and execution purposes.

To provide you with an even clearer picture, there are three major points present in this trading. One is your algo trading logic, second is API service and third is the broker’s trading terminal. The process follows in a manner where you receive data from API service and plan trading strategies as per market conditions. Next, the trades are sent to API, which send the orders to the broker’s terminal for execution purposes. 

Advantages of API based Trading

1. As compared to the colo based algo trading, API based is much more cost-effective which can be a major factor while calculating trading returns.

2. This also helps in protecting the unique trading ideology and strategy of the trader which they must have developed over the years. This is because of the intervention of coding strategy on API and then executing via broker.

3. You can create bespoke trading solutions with the help of coding advanced algorithms.


Disadvantages of API based trading

1. Lower Speed: As mentioned above, this type of trading requires three nodes for the completion for trades (Algo Logic, Order flow through API & Trades done at broker terminal). This delays the entire process when compared to colo based algo trading (Algo logic and trade execution at one place).

2. Prior experience of coding: In order to create your own trading strategies, have a solid expertise in the programming field (Like Python, Dot Net etct).


Both of the methods mentioned above have their own perks and disadvantages. To summary,

1. The Co-Location basedAlgo based trading is much beneficial in terms of speedy execution, impossible to match by API based trading.

2. The co-location based algo trading process is often costly to purchase On the other hand, the API based are much more pocket friendly.

3. Algo based trading can lead to disclosure of your hard-earned trading strategies, which can be easily avoided in case of API based.

4. Co-location based setup is normally being acquired by professional traders, where trading volumes are high and speed (Slippage) is of much concern in execution, while API based automated setup may be acquired by retail traders where trading volumes are low and speed is not much of concern.

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