| December 03, 2020
What is a more effective way of executing automated trading?
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 algo trading and API application-based trading. While 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.
What is 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 your algo will produce buy or sell orders with stop losses as per the 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. The brokers might also partner with innovative platforms like Prorealtime and Meta Trader4 to offer you advanced technology and tools to make this a customer-friendly experience.
It is important to understand that your trading strategy plays a vital role in the trades 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
Here are some of the advantages of Algo trading:
- Due to direct placement of your order on the broker’s terminal, the execution speed is extremely high often in milliseconds or even microseconds.
- These trades are low maintenance with your set-up running throughout the day.
- Brokers also provides some pre-loaded and pre-approved trading strategy for the use of traders.
- Access to advanced technology to combat trading and reduce false signals, one of the major reasons behind losses.
- Option to add as many advanced trading strategies with no extra costs to leverage more trading.
- The trader doesn’t have to be an expert in coding or programming.
Disadvantages of Algo Trading
Here are some of the disadvantages of Algo trading:
- High costs associated with expensive algorithm softwares, which eat into the realistic profit potential from your algorithmic trading venture.
- The algo trading strategies are applied directly on the broker’s terminal which might lead to distortion or even disclosure of your trading style.
- There can be some cases of faulty softwares which may lead to hefty losses in the financial markets.
API application-based Trading
What is API application-based 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 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 automated trading solution, 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 strategies are sent to API, which send the orders to the broker’s terminal for execution purposes.
Advantages of API Based Trading
- As compared to the algo trading, API based is much more cost-effective which can be a major factor while calculating trading returns.
- 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.
- You can create bespoke trading solutions with the help of coding advanced algorithms.
Disadvantages of API Based Trading
- Lower Speed: As mentioned above, this type of trading requires three nodes completion for trading purpose. This delays the entire process when compared to algo based trading.
- Prior experience of coding: In order to create your own trading strategies, have a solid expertise in the programming field.
Both of the methods mentioned above have their own perks and disadvantages. To summary, the Algo based trading is much beneficial in terms of speedy execution, impossible to match by API based trading. The algo trading process is often costly to purchase and may be full of loopholes, which leads to losses. On the other hand, the API based are much more pocket friendly. It can lead to disclosure of your hard-earned trading strategies, which can be easily avoided in case of API based.